Commercial law lessons from history: Force majeure contract provision invoked during Spanish influenza pandemic of 1918 after government-imposed quarantine
A California case from 1920 discussed legal issues that arose from a commercial contract for the sale of glycerine during the Spanish Influenza Pandemic of 1918. Now 100 years later, the lessons from Citrus Soap Co. v. Peet Bros. Mfg. Co., 194 P. 715 (Cal. App. 2d Dist. 1920) are relevant to the legal issues faced by businesses today during the global coronavirus outbreak (COVID-19) and will help guide business decisions.
In 1918, a San Diego company, Peet Brothers Manufacturing, entered into a contract with the Citrus Soap Company for the sale of “11 to 12 drums” of “soap lye crude glycerine” at 30 cents per pound. Under the terms of the contract, the glycerine was to be delivered to Citrus Soap in Berkley, California “as made, but entire delivery to be completed prior to December 31, 1918”. The contract also included the following force majeure provision:
“This contract is made subject to suspension in case of fire, flood, explosion, strike or unavoidable accident to the machinery or the works of the producers or receivers of this material, or from any interference in plant by reason of which either buyers or sellers are prevented from producing, delivering or receiving the goods and in such event the delivery thus suspended is to be made after such disabilities have been removed; otherwise to be fulfilled in good faith. Notice, with full particulars and the probable term of the continuance of such disability, shall be given to the other party hereto, within ten days of the date of the occurrence of such disability.”
On November 11, 1918, Peet Brothers Manufacturing started manufacturing and eventually delivered three drums of glycerine to Citrus Soap. During that same time period, in November and December 1918, San Diego experienced an epidemic of Spanish influenza. To protect the health and welfare of its citizens, on December 5, 1918, San Diego adopted a quarantine order that “all factories and places of business” shall be closed from December 6 through December 10. To comply with this governmental order, the Peet Brothers Manufacturing facility closed. On December 9, Peet Brothers Manufacturing sent the following letter to Citrus Soap:
“Please be advised that we have been forced to close down by the health authorities due to the quarantine established in San Diego against the influenza. The quarantine went into effect Friday morning, the 6th of December, and we may be compelled to take advantage of the contingency clause of our contract. However, we have finished six drums of the glycerine, three of which we have already shipped, and we are in hopes of being able to deliver the entire amount by December 31st.”
After the quarantine order was lifted, Peet Brothers Manufacturing resumed full operations on December 15, 1918. As a result of the interference by the quarantine order, Peet Brothers Manufacturing was not able to manufacture the glycerine and deliver the nine remaining drums to Citrus Soap prior to December 31, 1918 as required by the contract. Peet Brothers Manufacturing claimed that “all the delay in arrival and delivery” of the glycerine was due to the interference caused by enforcement of the quarantine order. The remaining nine drums were shipped to Citrus Soap, but arrived on or after December 31, 1918 as follows:
“Four drums shipped December 21st, arrived at Berkeley December 31st; three drums shipped December 28th, arrived at Berkeley January 2d; two drums shipped December 30th, arrived at Berkeley January 7th.”
Even though Peet Brothers Manufacturing delivered four drums on December 31 and the remaining five drums in early January, 1919, Citrus Soap refused to accept and pay for them.
The Lawsuit & Legal Arguments
As a result, Peet Brothers Manufacturing filed a lawsuit against Citrus Soap for breach of contract for its failure to accept and pay for these nine drums. Even though the glycerine conformed to the contract, Citrus Soap rejected them and denied liability because the nine remaining drums did “not arrive at the agreed place of delivery before the 31st day of December, 1918.” Citrus Soap argued that (1) if Peet Brothers Manufacturing was reasonably diligent in its production all of the drums should have been produced as required under the contract before the quarantine order was in effect; and (2) the written notice provided by Peet Brothers Manufacturing to Citrus Soap was insufficient under the contract.
After hearing the evidence, the court found that Peet Brothers Manufacturing’s failure to deliver all of the glycerine prior to December 31 was caused by the quarantine and consequent delay in production. The trial court awarded damages in favor of Peet Brothers Manufacturing and against Citrus Soap in the amount of 22 cents per pound, which reflected the market value of glycerine at the time Citrus Soap refused to accept and pay for the nine drums. (This principle now is reflected in Section 2-703 of the Uniform Commercial Code). Citrus Soap appealed.
On appeal, the court rejected both legal arguments by Citrus Soap and held that Citrus Soap was liable to Peet Brothers Manufacturing for the nine remaining drums. With respect to the first argument, Citrus Soap argued that the glycerine should have been timely produced and delivered if Peet Brothers Manufacturing was reasonably diligent in its production. If Peet Brothers Manufacturing produced at the rate of three drums per week, then the entire amount required by the contract would have been produced by December 6, 1918 and there was no evidence to excuse Peet Brothers Manufacturing’s failure to deliver to the agreed amount of glycerine prior to December 31, 1918. The court rejected this argument because there was evidence before the court that showed the rate of production was less than three drums per week.
With respect to the second argument, Citrus Soap argued that Peet Brothers Manufacturing “did not give notice of the interference in operation of its plant, and probable continuance of delivery, as required by the contract.” Citrus Soap claimed that “this was not the notice required by the contract, because it failed to state the probable term of disability, and because it further stated that [Peet Brothers Manufacturing] hoped to be able to deliver the entire amount by the specified date.” The Court found that while “the notice did not in terms set out the number of days of delay in production and shipments which would probably result from the quarantine, it did imply that the delay might carry the time of completion of deliveries to a date later than December 31st, although [Peet Brothers Manufacturing] hoped that this result might not follow.” The Court rejected this argument and found that “the contract did not require more than that reasonable warning be given of the fact of delay, the nature of the cause thereof, and the probable extent of interference with timely performance of the seller's obligation. The notice given was a reasonable attempt, in good faith, to meet these requirements.” The court found that Peet Brothers Manufacturing provided prompt written notice to Citrus Soap, which sufficiently complied with the requirements of the contract.
The court of appeals affirmed the trial court’s decision and held that under the terms of the contract, Peet Brothers Manufacturing was entitled to perform the contract within a reasonable time after December 31. Since Peet Brothers Manufacturing performed in a reasonable time and delivered the glycerine to Citrus Soap, Citrus Soap was “bound to perform the contract” and was held liable for breach of contract when Citrus Soap wrongfully rejected the glycerine and refused to pay Peet Brothers Manufacturing for the nine remaining drums.
Lessons Learned 100 Years Later
In 2020 during the coronavirus outbreak, businesses now are faced with similar legal issues regarding commercial contracts as the businesses in Citrus Soap Co. v. Peet Bros. Mfg. Co. faced in 1918 during the Spanish Flu outbreak and government quarantine. Peet Brothers Manufacturing complied with the contract and was successful in its lawsuit for damages against Citrus Soap because it clearly communicated and properly invoked the force majeure provision in its notice letter to Citrus Soap. Additionally, once the quarantine order was lifted, Peet Brothers Manufacturing made reasonable efforts to deliver the goods as close to the contractual deadline as possible. These are simple lessons that may be valuable to businesses today and may help guide strategic decisions.
During the global coronavirus outbreak (COVID-19), businesses should first review their contracts to determine if there is a force majeure provision and (if there is such a provision) under what circumstances may force majeure be invoked. Second, businesses should consult an attorney to discuss the legal implications of invoking a force majeure provision and how to prepare a proper notice. It is important to consult an attorney to minimize damages, mitigate legal risk, and evaluate legal rights and remedies under the Uniform Commercial Code.
Please contact the attorney listed below to discuss these issues.