Force Majeure clauses and COVID-19

The coronavirus has drastically changed life as we know it.  Sporting events have been cancelled, schools have been shut down, many  businesses have closed their doors and people have been required to quarantine at home.   During this difficult time, many businesses are struggling to survive and trying to determine how to salvage their companies.  Advertising companies, restaurants, hotels, retail shops, cruise lines, airlines and numerous others are examining the terms of their agreements to determine whether they have the appropriate contractual rights to protect them. 

Commercial tenants are questioning whether COVID-19 and its resulting business closures constitute an “act of God.”  Force majeure clauses in insurance policies justify a tenant’s suspension of its’ duties under its’ lease, including the payment of rent.  Whether the pandemic is found to constitute a force majeure depends upon the specific contractual language of the policy, local law and the “causal connection between the pandemic and the particular tenant’s inability to meet its lease obligations.”  Black’s Law Dictionary explains that a force majeure is “meant to protect the parties in the event that a contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of due care.”  The majority of force majeure clauses specify that they apply only when performance is rendered impossible.  

Force majeure events typically include the following: 

1. Acts of God: such as fires, floods, hurricanes, etc.
2. War and acts of terrorism
3. Epidemics
4. Acts of governmental authority: such as condemnation, expropriation and changes in laws and regulations
5. Strikes and labor disputes.

In determining whether a force majeure clause could apply to the current pandemic, courts look to whether: (1) the event qualifies as a force majeure under the agreement; (2) the risk that nonperformance was foreseeable and able to be mitigated; and (3) performance is truly impossible.  The court closely examines whether the event giving rise to the nonperformance is expressly listed as a qualifying force majeure in the clause at issue.  Even if a party satisfies these 3 requirements, it cannot invoke the force majeure doctrine if: (1) it could have foreseen and mitigated the potential nonperformance, and (2) performance is merely impracticable or economically difficult rather than truly impossible. 

In addition, to determine whether a force majeure clause applies to COVID-19, it is essential to closely examine the language of the contract.  Courts may determine that the coronavirus is not covered by a contract unless the force majeure clause in the agreement specifies coverage for a pandemic.  Even if a force majeure clause includes pandemics, parties seeking to invoke the provision will still need to demonstrate: (1) that they took steps to mitigate the damage, and (2) that performance is truly impossible. 

Recent governmental regulations intended to contain COVID-19, may make it easier to invoke a force majeure clause not previously triggered by the virus.  Restrictions on travel and large gatherings have caused significant business interruptions and country-wide event cancellations.  As a result, businesses may be able to invoke force majeure clauses to excuse contractual nonperformance resulting from these measures, if the provisions at issue enumerate government orders or regulations that make performance impossible.  Parties seeking to invoke a force majeure provision in these situations must still demonstrate an inability to mitigate the damage and that performance is truly impossible. 

Furthermore, the ripple effects in a force majeure situation can be significant when it comes to supply chains.  In such a scenario, a party is dependent upon the performance of a prior business for the production of goods.  The inability of the first company impairs the ability of the subsequent party to perform its’ functions.  For instance, if Business 1 is impaired, then Business 2 might have a force majeure argument as would Business 3, descending the chain to the sale of the product.  A force majeure clause may allow for delays up to a specific amount of time, following which a business can terminate the contract.

With government regulations growing stricter by the day, businesses in every industry are being squeezed financially.  When the sports world abruptly halted in early March, the NBA drew significant attention when it examined the force majeure provision contained in its’ collective bargaining agreements (CBA).  Pursuant to the CBA, the NBA has the ability to reduce the amount of money owed to players by approximately 1%.  In addition, the NBA’s force majeure provision allows it to cancel the CBA upon the occurrence of a force majeure.  The reason the NBA’s force majeure garnered so much attention is because the league only committed to pay player’s salaries in full through April 1^st. Some players chose to be paid over the course of the calendar year beginning on November 15^th, leaving a great amount of money facing the league.  For example, assuming that nearly all of the players opted to have their salaries paid over 12 installments during the course of the season, 90% of the salaries would be paid by April 1. The remaining 10% would total $318,798,784, of which the league could withhold $3.3 million, which would yield approximately $110,000 saved per team. 

We have no idea when the government regulations will be relaxed and when businesses will resume their operations.  Many businesses will close their doors.  If your contract has a force majeure provision, it may prove to be an extremely useful tool and relief during these uncertain times.  Whether or not your business can invoke the force majeure provision in your contract depends largely on the wording of the contract.  It is highly advisable to obtain knowledgeable legal counsel to determine the rights and options for your business.  For a consultation contact Eileen Kendall at Kendalllaw.net at (310) 619-4941