The Coronavirus, medically labeled as COVID-19, has now directly impacted the personal lives of every American citizen. Additionally, to an extent not yet completely known, it is affecting business relationships across the United States. Workers across the globe are contracting the virus, leaving them unable to perform their jobs. Business owners are being forced to shut their doors and reevaluate their finances to determine if they can weather this historic global catastrophe. As the implications of this virus evolve and take form, businesses and municipalities are going to be required to analyze their current contracts to determine whether or not they have a legal remedy for their inability, or the other party's inability, to perform the existing contractual obligations.
Enter; the Force Majeure clause. Force Majeure clauses are contract provisions that may excuse a party to the contract for their inability to perform its contractual obligations under a contract if an unforeseeable event prevents them from doing so. A typical example is a natural disaster that negatively affects a seller's ability to deliver goods to a buyer, as stated in a contract between the two of them. If a contract does not contain a Force Majeure clause, a court's decision of whether to excuse the impacted party's performance depends upon foreseeability and causation.
If a contract does include this clause, the key consideration is whether it includes explicitly the event preventing the performance. Both Commonwealth and federal courts have strictly focused on the language of the Force Majeure clause itself in determining whether a party was excused from performance. Indeed, the entire purpose of these provisions is to define the scope of events beyond a party's control that excuse non-performance.
Catch all language, such as “Acts of God,” may not always cover the natural disaster or, in the case of the Coronavirus, the pandemic that is affecting performance. In 2017, a Commonwealth Court judge rejected the “Polar Vortex” as an Act of God, which made transportation impossible. Pennsylvania courts have even rejected hurricanes as an Act of God, where the clause did not specifically identify that as a reason for non-performance, and the language was ambiguous as to whether hurricanes were intended to be an Act of God. In short, relying upon the Coronavirus to be considered an Act of God by the courts is a dubious proposition at best.
”Government Action” is an often used and included phrase in Force Majeure clauses. However, it depends upon whether the clause specifies what degree government action must impact performance before the clause applies. This is important because generally acts of third parties making performance impossible do not qualify as a Force Majeure event if the acts were foreseeable.
When it comes to foreseeability, the Coronavirus leaves us with a moving target. When was it that a business could have foreseen this massive shutdown? When was it that a reasonable business owner could have foreseen that her ability to perform specific contracts were to be hindered by this virus? These are questions that the courts are going to be tasked with answering in the not-so-distant future.
Clients facing these issues should consider four key factors:
1) The precise language of the clause (if there is one);
2) Whether they have evidence that the Coronavirus was unforeseeable to them at the time of the contract being executed;
3) Whether they have proof of causation between the coronavirus pandemic and the resultant non-performance; and
4) Whether they have evidence that the effects of the Coronavirus were so severe that the contractual obligations could not be performed.
If a business or municipality is impacted by the Coronavirus and believes that the Force Majeure clause in their contract applies, they must provide notice to the other party of the contract and mitigate and minimize the effects of the Coronavirus on their contractual relationship. For example, an extension or amendment may be made between the parties to avoid litigation.
Business owners and municipalities should also check their insurance policies for “crisis management coverage.” This type of policy is intended to cover expenses incurred as a result of an emergency such as the COVID-19 pandemic. This coverage could potentially cover things such as payroll costs for employees that are not allowed to work (or ones that are required to work), costs incurred as a result of interruption of their business, the cost of breached agreements due to impossibility of performance, costs of working remotely, and more. These policies should be reviewed by an attorney, but timing may be crucial, as these coverages often have strict notice provisions.
Many arguments on the use of these clauses will turn on whether “but for“ this virus, the breaching party could have performed. Municipalities and businesses seeking to enforce a breached contract may argue that the breaching party's resort to Force Majeure is a pretext, and they would not have been able to perform regardless of the pandemic. For this reason, your clients must create a paper trail of their handling of this crisis.
In conclusion, a Force Majeure clause can serve as a life preserver to businesses and municipalities faced with adverse impacts of the Coronavirus, or it can be merely a mirage of protection. If the Coronavirus impacted your clients' contractual relations, there are many factors to consider. Nonetheless, starting with the contracts themselves and the insurance policies they hold can provide the attorney with a solid launching point.
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This article is for informational purposes only and does not constitute legal advice.