A significant portion of the world is in the midst of a COVID-19 health crisis. While public safety and health are rightfully the top priorities, there are many questions swirling around the impact this public health crisis will have on the business and nonprofit communities. One major concern relates to contractual obligations and business transactions—will they move forward (business as usual) or will a contracting party have legitimate grounds to terminate the contract in light of the surrounding circumstances.
The answer to many of these contract-related scenarios could boil down to a single clause found in many business contracts known as the force majeure clause. The term “force majeure” is defined in the Oxford Dictionary as “unforeseeable circumstances that prevent someone from fulfilling a contract.”
In a contractual relationship, does the COVID-19 crisis constitute a force majeure event?
Naturally, the answer being provided by an attorney is “it depends”. While the force majeure concept is commonly addressed in business agreements, the specific language can vary dramatically from one contract to another; thus, the first step in analyzing this question is to carefully read the force majeure clause to determine exactly what it covers. As lawyers cannot rewrite current agreements (in most cases) to address the current fact patterns, they should learn from the host of issues that are presenting themselves during this crisis and apply that learning to future transactions.
I recently read about a contract dispute between a franchisee who had contracted to operate a restaurant at Washington’s Regan National Airport. After the 9/11 tragedy, the FAA closed the airport for months following the attack on the Pentagon, with no assurance it would ever reopen. The franchisee reviewed the force majeure clause in the key agreement and found that the situation was not caused by “an act of God,” war, etc. It was the decision of the government to protect against the consequences of future attacks by terrorists. No war had been formally declared. The airport had not been attacked. Anticipating responses to other terrorist attacks required modification to the “standard” force majeure clauses that were used prior to 9/11.
With COVID-19, the critical question to ask is what action or fact would invoke the force majeure clause? Cancellation of flights? Closing of manufacturing facilities? Government restrictions on people gathering, including at work? Fear of being in crowds with people who may be infected? School closings that force parents, a significant portion of the workforce, to stay home from work to care for their children? Unwillingness of fearful customers to visit restaurants or retail establishments?
A meeting sponsor wants to cancel a meeting because it fears that expected attendees will not register to attend (or will cancel existing registrations). A relevant business concern, but the meeting is still six weeks away. The sponsor does not know whether people will or will not attend. At this point, the venue has not experienced an outbreak of the virus. Would a judge condone the cancellation of the event because of concerns that people may not attend? Who has accepted the risk of that? The host venue or the event sponsor?
The next step is to consider what should be the consequences of a force majeure? A seemingly simple question, but one that is difficult to answer.
Force majeure clauses come in lots of shapes, sizes, and flavors. They are not necessarily limited to just “acts of God.” Set forth below is a sample force majeure clause that, by its nature, should cover problems arising due to COVID-19 without needing to specifically identify the virus.
Force Majeure. ABC Corp. is not liable for loss or damage, or deemed in breach of this Agreement, if its failure to perform any obligation under this Agreement as a result of any of the following causes:
i. telecommunications and utilities interruptions (including loss of Internet and electrical service), computer malfunctions (including malfunctioning computer hardware and software and peripherals), extreme weather and climatic conditions (including hurricanes, tornados, and flooding), transportation shortages or inadequate supply of equipment, merchandise, labor, material, or energy;
ii. compliance with any applicable law;
iii. war, acts of terrorism, strikes, natural disaster, public health crisis, or acts of God; or
iv. any cause beyond its control.
Any delay in ABC Corp’s performance resulting from any of said causes extends the time for performance accordingly or excuses performance, in whole or in part, as may be reasonable. Without limiting the generality of the foregoing, the Franchisee acknowledges that services involving, or depending upon, computers or the Internet may be unreliable and that service interruptions thus will occur even in the exercise of the greatest care. Accordingly, ABC Corp. disclaims any representations, warranties, and covenants-express or implied-that the services it is obligated to perform that involve, or depend upon, using computers, software, or the Internet will be provided free from interruption or malfunction.
Aside from reviewing contract language, business owners should also carefully consider their insurance coverage and seek clarity what COVID-19-related losses might be covered under existing coverage. An insurance policy is nothing more than a contract, so it is a matter of carefully reading the policy, reaching out to your insurance representative to seek clarity on the extent to which you have coverage for a specific loss or liability. Often, you will be surprised by what you learn by actually reading the insurance policy…and it usually is not a pleasant surprise.
If you need help drafting or analyzing business contracts, reach out to Perkins Law anytime for a free consultation.