Whether you agree with the shutdowns and government actions that have resulted from the COVID-19 pandemic, the reality is there have been significant economic implications. As months and years go by, there will almost certainly be heavy amounts of litigation surrounding this pandemic.
What is Force Majeure?
Force majeure can be defined as an event of superior force that cannot be anticipated or controlled. The language typically includes a list of events, the occurrence of which typically limits or temporarily frees one or more of the parties’ obligations to the other; examples of such events include acts of God, war, terrorism, strikes, fire, acts of government and many more. Pandemics are another type of force majeure event that, for obvious reasons, have recently garnered considerable global attention.
How It Might Apply
It does not require a huge imagination to see how this pandemic could qualify as a force majeure event. The basic premise is that a party could argue that the coronavirus pandemic, through the resulting shutdowns, health risks and other consequences, limits them from performing part of a contract. For example, a manufacturer might argue that a delay in delivery is justified because the pandemic resulted in imposed shutdowns, or perhaps, reduced the labor force. On the other hand, a buyer might argue that he should be able to delay vessel acceptance if unable to perform a part of the pre-purchase due diligence.
I had several clients make similar arguments early in the pandemic. Specifically, they wished to delay delivery and final payment until they were able to travel safely to perform final inspections and navigate the boat to its hailing port upon reopening of the marinas. It forced us to take a closer look at COVID-19 as a force majeure event.
Does It Qualify?
A contract normally lists the events that apply, and there is often additional catchall language in the provision that states that any event or circumstance outside the parties’ control also qualifies as a force majeure event. Indeed, COVID-19 would likely qualify if the language in the force majeure provision includes specific references to a pandemic or epidemic. Even without such specificity, COVID-19 could also qualify if the language includes more general events, including disasters or acts of God, but it is difficult to know how the courts will rule until these theories are tested in the coming months.
Parties must exercise caution prior to invoking a force majeure clause. Regardless if COVID-19 falls within the scope of the relevant force majeure language, the parties must be certain the event itself is what materially impacts the ability to perform. In other words, there is a causation element to force majeure through which a party must prove the event made it impossible to fulfill its obligations. An event does not qualify as one of force majeure just because it makes things more economically or financially difficult. Rather, the event must make performance of a contract impossible or severely impractical. Additionally, the party claiming force majeure should also take reasonable steps to mitigate the damage caused by the event to the extent possible. Otherwise, a court might be hesitant to award any relief to the party making the claim.
New Language in Contracts
We will undoubtedly see a lot of discussion and legal opinions on this topic, and I suspect it will result in new language added to common provisions used in contracts today. Most experts believe the repercussions from this pandemic will not be felt until well after it is over. Of course, businesses must do what they can to stay afloat and maintain employment levels. I believe it is especially important right now for businesses to work together to find a solution to a dispute rather than look for ways out of an agreement.