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Thursday, March 26, 2020

Force Majeure Provisions & COVID-19

On March 11, 2020, the World Health Organization declared the novel coronavirus (more commonly known as COVID-19) to be a pandemic.  For many Americans, this was their first experience with a disease that had a power to disrupt life on such a global scale.  Many of us had watched movies such as Contagion or Outbreak, and thought those we were scary, but unlikely, stories.  In the world of commercial and contract law, there is a term of art that is often thrown about but not very often utilized: force majeure.

A force majeure event involves an occurrence which is outside the reasonable control of a party and which prevents a party from performing his, her, or its obligations under an otherwise valid contract.  Some lawyers will by habit put a force majeure provision into a contract, and otherwise leave it out as unnecessary padding.  Due to the rarity of the usage of force majeure provisions, there has been a lot of discussion in the legal community about how force majeure provisions apply to the COVID-19 outbreak.

Historically, the legal community has used force majeure provisions to account for the possibility of "acts of God," "war," "terrorism" and "disaster" interfering with contractual obligations.  Many things or events come to mind when those words are used, such as hurricanes, earthquakes, 9/11, and the Boston Marathon bombing, but not necessarily "epidemics," "quarantines," or "diseases."

A force majeure provision effectively would allow a party affected by such an event to be relieved from performing the obligation under the contract for the duration and to the extent affected.  Additionally, the party may even be entitled to compensation.  However, if the force majeure provision is not included in a contract, a Court is unlikely to read one into the contract.  Furthermore, Courts will tend to limit the definition of "acts of God" (the most common definition in a force majeure provision) to such occurrences as flooding, earthquakes, and tornados.

With the unprecedented speed and disruption caused by the COVID-19, the Courts will undoubtedly be dealing with extensive litigation claiming force majeure as a method to null and void contracts, or at least provide an acceptable excuse for failure to perform.  However, for these claims to be successful, the force majeure provision will likely need to have been drafted in such a way that clearly defines a health pandemic as either an "act of God" or an additional consideration under the provision.  The Courts are unlikely to include COVID-19 under traditional considerations of force majeure provisions as the Courts place a high emphasis on the certainty of contracts to function properly and clearly lay out roles and responsibilities.

An addition wrinkle in the COVID-19 / force majeure circumstance is what is ultimately decided to be the reason why performance was rendered impossible: the naturally occurring phenomenon or the government's response to it. 

Take for an example, a couple who contracts with a wedding venue to host their wedding and provide food for one hundred and fifty people.  Due to the instructions of the government, crowds of ten or more people are banned from getting together.  Therefore, an argument could be made that the wedding venue was unable to fulfill its obligations under the contract because of the governments reaction to COVID-19 and not because of COVID-19 itself.  This type of thought process will also undoubtedly lead to extensive litigation and dispute once things begin returning to normal.

Going forward and after the Court has made unavoidable rulings regarding how COVID-19 syncs with force majeure provisions in contracts, it will be the responsibility of attorneys to review force majeure provisions in contracts to make sure that proper consideration is given to similar pandemics in the future.   

If you have any questions about force majeure provisions, or how COVID-19 impacts your contractual agreements, please feel free to contact the Law Offices of Samuel S. Reidy for a free consultation.

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