Many Illinois cannabis contracts, including intellectual property licensing agreements, development agreements and supply agreements, contain force majeure clauses.  Depending upon the language of these clauses, the COVID-19 pandemic may be an event that triggers these clauses and provides a defense to nonperformance of the contract.

Companies that are experiencing difficulties complying with or enforcing compliance with their contracts should carefully examine their contracts to determine if a force majeure clause may excuse performance.

On March 20, 2020, Illinois Governor J.B. Pritzker issued a stay at home order for all Illinois residents.  (Executive Order 2020-10.)  On April 30, 2020, Governor Pritzker extended the stay-at-home order through May 30, 2020.  (Executive Order 2020-32.)  Many other state and local government agencies have taken similar measures.  And, while cannabis dispensaries and cultivation facilities are deemed to be “essential businesses” under the Illinois orders, some other states, such as Massachusetts, have not exempted such facilities.[1]  As a result of the restrictions placed on businesses due to the COVID-19 pandemic, companies operating in the cannabis industry in Illinois may be experiencing compliance-related difficulties with their contracts.

Illinois Force Majeure Law

Force majeure provisions seek to allocate the risk between the parties when an unforeseen event makes contract performance impossible or impracticable.  Force majeure provisions often are included in business agreements and may be triggered by the occurrence of an event deemed beyond the control of a party.  Typically, the agreement itself will specifically enumerate the events that may trigger the provision.

A typical force majeure clause may provide as follows:

In no event shall a Party be responsible or liable for any failure or delay in the performance of its obligations hereunder arising out of or caused by, directly or indirectly, forces beyond its control, including, without limitation, strikes, work stoppages, accidents, acts of war or terrorism, civil or military disturbances, nuclear or natural catastrophes or acts of God, and interruptions, loss or malfunctions of utilities, communications or computer (software and hardware) services; it being understood that the Party shall use reasonable efforts to resume performance as soon as practicable under the circumstances.

Business disruptions relating to the COVID-19 pandemic may arguably be considered within this language (e.g., work stoppages, acts of God or civil disturbances).

Under Illinois law, a contractual force majeure clause supersedes the common law doctrine of impossibility.[2]  Illinois courts typically construe force majeure clauses strictly and excuse nonperformance only due to circumstances that are, in fact, beyond the control of the contracting parties.  As the Seventh Circuit has explained, “a force majeure clause interpreted to excuse the buyer from the consequences of the risk he expressly assumed would nullify a central term of the contract.”[3]

Illinois courts also recognize the doctrine of commercial impracticability under Section 2-615 of the U.C.C. where contracts for sale are involved.  Three conditions must be met before a seller is excused from performance under Section 2-615: (1) a contingency must occur, (2) performance must thereby be made “impracticable”, and (3) the nonoccurrence of the contingency must have been a basic assumption on which the contract was made.[4] Under Section 2-615, “performance on schedule need not be impossible, only infeasible—provided that the event which made it infeasible was not a risk that the promisor had assumed.”[5]

At present, there have been no cases applying Illinois law that have decided whether to enforce a force majeure provision due to the COVID-19 pandemic.

Other Potential Defenses to Contract Performance

Evn if a contract does not contain a force majeure clause, there are several other Illinois legal doctrines that a party to a life sciences agreement may look toward to relieve contract performance as a result of the COVID-19 pandemic.  These remedies include frustration of purpose, impossibility and illegality.

Frustration of Purpose

The Restatement (Second) of Contracts, Section 265 defines frustration of purpose as follows:

Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or circumstances [of the contract] indicate the contrary.[6]

Illinois courts have “set out a rigorous two-part test which requires a party to show that: (1) the frustrating event was not reasonably foreseeable; and (2) the value of counterperformance has been totally or nearly totally destroyed by the frustrating event.”[7]  The frustration of purpose defense is not to be applied liberally.  Rather, the frustrated purpose must be so basic that both parties to the agreement understood it.[8] As one prominent treatise explains:

“Frustration of a purpose” of a contract is generally asserted where a change in circumstances makes one party’s performance virtually worthless to the other, frustrating his purpose in making the contract; furthermore, the frustration must be so severe that it is not fairly to be regarded as within the risks that he assumed under the contract, and the non-occurrence of the frustrating event must have been a basic assumption on which the contract was made.[9]

In the context of COVID-19, a party may attempt to argue, for example, that the purpose of the contract was frustrated due to the disruption of its business caused by the COVID-19 pandemic.

Using a supply requirements contract as an example, if a supplier’s plant (outside of Illinois) was shut down due to COVID-19-related events, the supplier may argue that its principal purpose — to meet supply requirements — was frustrated by the occurrence of the COVID-19 pandemic and that the closure due to the pandemic was not the fault of the supplier.

Impossibility

As noted above, a contractual force majeure clause will supersede the common law doctrine of impossibility.  However, if a contract does not contain a force majeure clause, the doctrine of impossibility may provide a defense.  The doctrine of impossibility may excuse contract performance where: (1) performance is objectively impossible and cannot be performed by any means and (2) the event giving rise to impossibility is unanticipated and unforeseeable.[10]

Again, you can see how this may play out in the current climate.  For example, a party may attempt to argue that its performance under a contract has been made objectively impossible by a work stoppage due to the COVID-19 pandemic and that these events were not reasonably foreseeable.

Using a supply requirements contract as an example, a supplier could argue that, if its plant were shut down due to COVID-19-related events, its ability to meet its supply obligations was rendered impossible and that a global pandemic of the scale of COVID-19 was unanticipated and unforeseeable.

Illegality

The doctrine of illegality may be invoked if the terms of the contract are unachievable based upon enacted laws.[11]  In the context of COVID-19, a party to a contract may attempt to argue, for example, that contract performance has been rendered illegal due to stay-at-home orders enacted by state or local governments.

Practice Tips

Parties to cannabis contracts containing force majeure provisions that are at risk of nonperformance should consider the following:

• Carefully review the contract terms to determine if the contract has a force majeure clause, and, if it does, which events may trigger the clause.

• Carefully review the contract terms to determine which state’s law governs the contract.

• Attempt to mitigate damages. For example, a supplier might be able to shift production to another plant in a state where cannabis production is considered an essential business.

• Attempt to negotiate a compromise, such as extending deadlines for performance of certain aspects of the contract.

• Preserve evidence relating to the formation of the contract, past performance of the contract and any nonperformance.

• Continue to monitor state and local rules relating to COVID-19, such as stay-at-home orders and limitations on the number of persons who may gather.

• Parties to agreements that are subject to Food & Drug Administration (“FDA”) regulation should continue to monitor FDA-issued guidance for updates on guidelines and procedures relating to COVID-19.

• A party who has licensed intellectual property should take steps to ensure that the licensee is protecting the intellectual property during the force majeure event.

FOOTNOTES

[1]  Compare Executive Order 2020-10 at ¶ 7; Executive Order 2020-32 at ¶ 7, with Commcan, Inc. v. Baker, 2020 WL 1903822, at *3 (Mass. Super. Ct. Apr. 16, 2020) (denying motion for preliminary injunction challenging Governor’s executive order requiring closure of non-medical, adult-use cannabis establishments as “non-essential” businesses).

[2]  See Commonwealth Edison Co. v. Allied-Gen. Nuclear Servs., 731 F. Supp. 850, 855 (N.D. Ill. 1990) (“[T]he doctrine of impossibility is an ‘off-the-rack’ provision that governs only if the parties have not drafted a specific  assignment of the risk otherwise assigned by the provision.”).

[3]  N. Ind. Pub. Serv. Co. v. Carbon Cnty. Coal Co., 799 F.2d 265, 275 (7th Cir. 1986) (“NIPSCO”).

[4] See Luria Bros. & Co. v. Pielet Bros. Scrap Iron & Metal, Inc., 600 F.2d 103, 111 (7th Cir. 1979).

[5] NIPSCO, 799 F.2d at 276 (emphasis added).

[6]  Restatement (Second) of Contracts § 265 (1981).

[7]  N. Ill. Gas Co. v. Energy Co-op., Inc., 461 N.E.2d 1049, 1059 (Ill. App. Ct. 1984).

[8]  See id.; Smith v. Roberts, 370 N.E.2d 271, 273–74 (Ill. App. Ct. 1977) (holding frustration of purpose defense applied to lease agreement where building was destroyed in a fire).

[9]  Williston on Contracts § 77:12 (4th ed. West 2019).

[10]  See YPI 180 N. LaSalle Owner, LLC v. 180 N. LaSalle II, LLC, 933 N.E.2d 860, 865 (Ill. App. Ct. 2010).

[11]  1550 MP Road LLC v. Teamsters Local Union No. 700, 131 N.E.3d 99, 111 (Ill. 2019).