The COVID-19 pandemic caused businesses and individuals the inability to fulfil contractual obligations, led to a partial performance of the contract or delay thereof etc.
Most commercial contracts include Force Majeure clauses which allocate the of risk of events that may suspend or excuse contractual non-performance.[1] Being the creation of the parties, every clause will be examined according to its specific phrasing, checking whether the outbreak of Covid 19 will be considered a Force Majeure event within the clause.[2]
Where the contract does not include a Force Majeure clause, the question is whether the defence of Frustration of Contract may be invoked due to the Covid 19, which is the legal relief for unexpected events that may influence the performance of the contract.
Such questions may also be relevant to the relationship of Insured-Insurer. The insurance contract includes obligations and terms which may be affected by the crisis. The insured may be prevented from fulfilling his obligations under the policy due to the lockdown or other restrictive orders of the authorities, and the question is how this may affect insured’s rights under the policy.
Notwithstanding some differences between Force Majeure and the doctrine of Frustration, they share many similarities and this article will address both as one.
The Covid 19 Inter-Office (Contracts) Committee
The Ministry of Justice published on 8th July 2020 the conclusions of the inter-office committee which was established for reviewing the impact of COVID-19 on contractual performance.[3] The committee was comprised of representatives from several Ministries with the goal of forming a legal policy or guidance for contractual disputes arising from the Covid 19 crisis in order to minimize its effects on contractual relations.
The committee concluded that the Court may regard the Covid 19 crisis, as an unforeseeable event. However, this alone would not be enough for successfully invoking Force Majeure clauses in contracts or arguing for the Frustration thereof which will require a case by case examination.
Frustration of Contract– is it a dead letter?
The doctrine of Frustration is embodied in Article 18 of The Contracts Law (Remedies for Breach of Contract) 1970 and requires three accumulative elements: (a) The breaching party was not aware and could not be aware of the circumstances, which occurred after the contract has been concluded; (b) The breaching party did not foresee and was not able to foresee the circumstances, nor to prevent them; and (c) as a result, the performance of the contract has become impossible or substantially different than what was agreed by the parties. The burden of proving the three requirements lies on the non-performing party arguing for this defence.
During many years , the Israeli Court approach towards this doctrine has been restrictive and it was decided that only few circumstances or events are such that a reasonable party could not foresee. [4] Events such as war[5], frost damage in agriculture,[6] deportation of Israeli citizens from Uganda in 1972[7] and delay in processing tax payments and land registration were not considered Force Majeure events,[8] as they could have been foreseen. While some opinions in the Israeli Supreme Court sought to render the definition of frustration of contract more flexible, they were not binding precedents.[9]
Tsunami, forest fires and floods were not recognised by the Israeli court as contractual frustration[10]. In CA 736/82 Kfar Hasidim v. Avraham (1985), early rainfall, which prevented seeds from growing, was held a foreseeable and not a frustrating event. In CA 345/89 Naot Dovrat V. Isralift (1992), the court held that heavy rainfall causing delay in construction was not a frustrating event, but distinguished between a reasonable quantity of rain in its season – which is not a cause for frustration – and irregular quantities and off-season rainfall which might be considered a frustrating event, in certain cases.
While in the rare cases in which the court did apply the doctrine [11] , it imposed a heavy burden on the non performing party. The test is a “double test”, subjective and objective, which examines both the actual expectation or knowledge of the specific party and those of the reasonable person[12].
The Court’s narrow interpretation of the frustration doctrine was sometimes even referred to as a “dead letter”,[13] as the Court often assumes that “anything can be predicted”.
According to this approach, epidemics and pandemics have been known to spread throughout history as part of nature and human existence. As such, their occurrence should be expected and hence they may not be considered as unforeseeable events.[14]
The Covid 19 Inter-office Committee recommends both a paradigm shift towards recognizing the pandemic as an unforeseeable event and legislative changes to make the requirements for Frustration more flexible .
However, according to the Committee, “unforeseeable event” only fulfils one of three conditions, both in a Force Majeure and a contractual Frustration scenario. Whether the rest of the requirements are met, will be decided by the Court on a case-by-case basis.
Eventually, the committee recommends the contracting parties to lessen the uncertainty by opting for alternative dispute resolutions, and cooperating in good faith for renegotiations. We doubt that this recommendation adds guidance towards solving the disputes.
Different approaches: Common Law vs. Civil Law
Israeli law was based in its early years on the English Common Law. The legislation of new contract laws (General Part and Remedies for Breach of Contract) introduced into the Israeli Law, the principles of Good Faith taken from Swiss and German Law. However, Court judgements still refer to the English precedents for interpretation. Due to the mixed sources of the Israeli law, a comparison between the Common Law and Civil Law approaches to this issue, is beneficial.
In a nutshell, the UK Law approach is similar to the Israeli one: Force Majeure clauses in commercial contracts will be interpreted according to the wording thereof. The Frustration doctrine may be raised when the contract does not include a Force Majeure clause, yet in reality it is very rarely applied[15]. In the U.S. the laws of most states require Force Majeure clauses to be interpreted narrowly.[16]
The Civil (Continental) Law approach to Force Majeure is less restrictive than in Common law systems.[17]
Recent COVID-19 Court Cases (in low instances) – still a rigid approach
Currently, the Israeli Court’s judgments in Covid 19 related claims has not shown a new trend nor a new spirit towards a more flexible approach.
In three recent judgments dealing with business rental contracts,[18] defendants were unsuccessful in raising the Frustration argument and the rented property was ordered to be evacuated due to non-payment of rental fees. The judgments were given by the Tel Aviv Magistrate court (low instance) which do not have a binding force.
Contradictory decisions were given in motions for injunction in connection with businessowners rent disputes. While one decision stated that “Corona is not a magic word for preventing a party from executing a bank guarantee“, in several other cases temporary injunctions were given to prevent the same.[19]
However, being decisions for temporary relief, they do not lay a basis for precedential rulings.
Will COVID-19 Increase Court Intervention in Private Contracts?
We think that this vast and unprecedented crisis justify a more active role to be played by the court, which as will be shown below, was provided by the law with the tools therefor.
A recent article “The Social Cost of Contract”, by D. Hoffman and C. Hwang, suggests that Covid-19 might cause Common Law jurisdictions to broaden their interpretation of Force Majeure due to public health concerns.
The writers show how the court intervened in the past when contractual performance posed a danger to public health for example, in the case of Hanford v. Connecticut Fair Association[20] , where the association breached a contract for running a “baby show” (similar to a beauty pageant) due to the spread of Polio disease in the year 1916. The court ruled that it would neither require the performance nor award damages when the performance of the contract endangers public health.
Similar cases considering public health have resulted from nearly every epidemic of the last two centuries, although not many, with the Court excusing, reinterpreting and reforming performance obligations on public policy grounds, in order to find equitable solutions, and protect the weaker party from bearing all the economic cost of the crisis.
The outcome of Covid 19 litigation is impossible to predict as it involves many different factors, hence the authors’ conclusion, much like the Israeli Inter-Office Covid 19 Committee’s, suggests that parties opt for compromise solutions and seek to share the economic burdens that their agreements may allocate. We believe that intervention of the Court is required by setting guidance and precedents as to the fair distribution of the burden .
Covid 19 and Insurance Obligations
Where the insured breached his obligations under the policy or under the law e.g to immediately report to the insurer that an insured event occurred, be present in his business when the alarm is activated, or where he aggravated the risk by failing to apply security measures while being restricted by the authorities, the question arises whether he may be excused for such failures due to Covid 19 .
The Insurance Contract Law ,1981 provides that where the insured’s failure to notify harmed the insurer’s ability to examine its liability under the policy, or where it aggravated the agreed risk, the insurance benefits may be totally denied or partially reduced proportionately to the damage caused. (Articles 24,18 respectively).
However, the insurer is not entitled to these remedies, where for example, the delay in notification of an event was caused “by justifiable reasons” (Article 24(a)1) and in aggravation cases, where the behaviour of the insured was aimed at “preventing grave bodily or property damage” (Article 19(3)) .
We believe that where the failures were caused by the lockdown, they may be justifiable, and it may be argued that the social distancing which led to the aggravation of risk, was aimed at protecting the health of the public, as was argued in the Hanford case.
Another Provision of the law empowers the court to award full or partial insurance benefits, even where the insured breached an obligation, if the Court “deems it just in the circumstances” (Article 29). This provision has not been applied so far in many cases and we think that it adds to the court’s tools kit an important way to reach fair and just solutions for the Covid 19 related cases.
The Insurance Contract Law was also inspired by the continental laws and deviated from the “All or Nothing” approach of the Common Law which prevailed in the insurance law in Israel prior to 1981.This deviation should guide the court towards more flexible determinations.
In Conclusion – Time for Court creativity
The Israeli law provides various “valve provisions” which grant the Court the discretion to reach a just and fair solution of disputes instead of ” all or nothing” result. The Contract Law (Remedies for Breach of Contract), authorizes the Court to deny the enforcement of the contract if under the circumstances, enforcement thereof is unjust (Article 3(4)). The Court may also condition the enforcement as it seems fit for a just result (Article 4). In addition, Article 18(b) in a Frustration plea grants the Court the power to impose on the parties respective duties concerning restitution.
Similarly in Insurance, the Court was “equipped” by the law with flexibility in order to reach fair settlements of non- performance cases by awarding partial benefits in appropriate cases.
The challenging Covid 19 crisis requires now from the Court to exercise its powers and be flexible and creative.
[1] Wm. Cary Wright, Force s Clauses and the Insurability of Force Majeure Risks, 23 Constr. Law. 16 (2003).
[2] The Israel Bar Association “Legal (Contractual) Ramifications of COVID-19”, April 6th 2020 (israelbar.org.il/article_inner.asp?pgId=413077&catId=5072).
[3] Ministry of Justice, Conclusions of the Inter-office Committee for Inspection of COVID-19 Implication on Contractual Performance, July 8th 2020 (hereinafter: “The Inter-office Committee”) (www.gov.il/BlobFolder/reports/corona-contracts-report/he/contracts-report-corona.pdf).
[4] Shalev and Zemach, Contract Law (2019); Dr. Drora Pilpel “Is Coronavirus a Force Majeure Event?”, April 10th 2020 (calcalist.co.il/local/articles/0,7340,L-3806560,00.html).
[5] Shalev and Zemach, Contract Law (2019) pp 768-770; CA 715/78 Katz v. Nitzhoni Mizrahi (1979); 2975/82 Lerer v. Holon Municipality (1983)
[6] CA 421/74 Shagan v. Madar (1974).
[7] CA 101/74 Hiram Landau v. Pituach Mekorot Mayim (1976).
[8] CA 767/77 Ben Haim v. Cohen (1979); CA 748/80 Goldstein v. Gov-Ari (1984).
[9] CA 6328/97 Regev v. Ministry of Defense (1992), p. 517.
[10] Pilpel “Is Coronavirus a Force Majeure Event?; Ministry of Justice, Conclusions of the Inter-office Committee.
[11] e.g. CC 1072/07 Gideon v. Fuchs (Nevo, 7.3.10) where the District Court accepted that a financing transaction was frustrated by the outbreak of the Lebanon war and hence, the broker was also not entitled to his fees. In the appeal (CA 3531/10) the Supreme Court led to a settlement of partial payment of the broker’s fees.
[12] Shalev and Zemach “Contract Law”, 767; LA 256/08 Kauka-Schwartz (Nevo, 13.2.11).
[13] Conclusions of the Inter-office committee, p. 4; Justice Zilbertal in CA 5054/11 Sapir and Bareket Real Estatate (Holyland) v. Amster, para. 36 (Nevo, 7.3.2013); Justice Amit in CA 4893/14 Zoebi v. State of Israel, para. 30 (Nevo, 3.3.16).
[14] Pilpel, supra.
[15] James Roberts, Tim Crockford & David Milner, Clyde & Co “COVID-19 UK: Force majeure… or simple frustration? Knowing where you stand in uncertain times” (clydeco.com/insight/article/farce-majeure-or-simple-frustration-knowing-where-you-stand-in-uncertain-ti).
[16] Colin C. Holley “A Closer Look At The Coronavirus Pandemic As A Force Majeure Event”, American Bar Association (https://www.americanbar.org/groups/tort_trial_insurance_practice/publications/committee-newsletters/closer_look_coronavirus_pandemic/) ;
[17] Clyde & Co, supra.
[18] CC 4492-05-20 Itzhaki v. H.I.A Partnerships (Nevo, 23.6.20); CC 27886-05-20 Agam v. Queenstown ( Nevo, 24.6.20); CC 64572-05-20 Geffer v. Joya ( Nevo, 15.7.20).
[19] OM (Tel Aviv) 12741-04-20 Rav Bariach v. P.L.A.R (16.4.20, Nevo); compare with CC (JLM Magistrate) 10815-04-20 Private Caliber v. D.J Associates (19.4.20, Nevo), CC (JLM Magistrate) 25129-04-20 (JLM Magistrate) Rikushet v. Alonim Marble (23.4.20, Nevo) and CC (TLV Magistrate) 8831-04-20 Boutique Yakov v. Ancom (7.5.20, Nevo).
[20] Hanford v. Conn. Fair Ass’n, 103 A. 838 (Conn. 1918).
Peggy Sharon, Adv.
