Force Majeure Clauses in Contracts During COVID-19
Can the pandemic still be considered unforeseen or an “act of God”? The enforceability of your contracts may depend on the answer.
At the start of the pandemic, whole industries ceased operations. Supply chains slowed. Companies closed their doors. For many business owners, revenues dropped drastically, having yet to recover. As a result, the terms of many contracts have become more challenging to satisfy. Property lease payments, insurance requirements, and the terms of an employment contract are just some of the obligations that business owners might have struggled to keep up with over the past year.
Is everyone who failed to meet some requirement in a contract during the pandemic liable for that failure? Not necessarily.
In contract law, we refer to a failure to meet a contract’s requirements as “nonperformance.” Some contracts may have a built-in cure for nonperformance that occurs as the result of a disaster. French for “greater force,” this cure is known as force majeure. Understanding force majeure, and COVID-19’s impact on force majeure in contracts, is vital for identifying what you may or may not be liable for during the pandemic.
What is a force majeure clause?
You’ll often find force majeure clauses amongst the generic “boilerplate” language near the end of a contract, but each clause is unique. Force majeure clauses cover what happens to the parties in a contract in case of an unexpected event or “act of God.” When one of these uncontrollable events occurs, a contracting party can use a force majeure clause to justify their nonperformance if they are sued. Typically, a force majeure clause will list the events that trigger its use, such as an earthquake, war, or pandemic. A clause describing specific triggering events might look something like this:
FORCE MAJEURE. Neither Party will be liable for any failure or delay in performing an obligation under this Agreement that is due to any of the following causes, to the extent beyond its reasonable control: acts of God, accident, riots, war, terrorist act, epidemic, pandemic, quarantine, civil commotion, breakdown of communication facilities, breakdown of internet service provider, natural catastrophes, governmental acts or omissions, changes in laws or regulations, national strikes, fire, explosion, generalized lack of availability of raw materials or energy.
For the avoidance of doubt, Force Majeure shall not include (a) financial distress nor the inability of either party to make a profit or avoid a financial loss, (b) changes in market prices or conditions, or (c) a party’s financial inability to perform its obligations hereunder.
How do force majeure clauses work?
Take the above clause as an example. Say Ashley and Bill form a contract where Ashley agrees to make and ship chairs to Bill within 30 days. An earthquake occurs, damaging Ashley’s chair factory. As a result, she cannot ship the chairs to Bill within 30 days. In response, Bill might sue Ashley for breaching their contract. However, because the clause details “natural catastrophes” as a force majeure event, a court might determine that Ashley is not liable for her inability to deliver Bill’s chairs due to the earthquake.
Still, when contract disputes land in the courts, these clauses are typically seen as applicable only in specific circumstances. A party’s liability might depend on a few inquiries:
- Was the event that caused the party’s nonperformance contemplated at the time the contract was formed? That is, is the event specifically identified as a force majeure event in the contract?
- Was the occurrence of the event beyond the party’s control?
- Was performance actually impossible or merely difficult?
Thus, the specific language of a force majeure provision can determine the outcome. Courts examine these disputes on a contract-by-contract basis. How the parties handled the unexpected event is important, but just as important are the conditions outlined in the contract itself.
Is the COVID-19 pandemic an “act of God”?
The COVID-19 pandemic has shed new light on force majeure clauses. Parties with contracts that classified “pandemic” as a force majeure event may likely be covered for impossibilities created by the shutdown. But what about those whose contracts only specified “acts of God?” Does it matter how foreseeable a pandemic is? Can “pandemics” be included in force majeure clauses moving forward?
These are new questions. Only time will tell how these types of clauses will be used and interpreted in the future. And in light of the past year, the inclusion of force majeure in future contracts may require new legal and business considerations.
As a whole, force majeure is just one part of a contract that can significantly affect your liabilities and obligations. Be sure to have a knowledgeable attorney review contracts for you and your healthcare practice or business. If you need help with a contract in one of the states where we are licensed, reach out to one of our attorneys. You can book a complimentary consultation to learn more about how we can support you.
The COVID-19 pandemic is a dynamic and evolving public health emergency. The laws and situation are fluid, and this article may not reflect the most current situation.
This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader. It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.