In March, the COVID-19 crisis brought global business to a virtual halt and threw contractual arrangements into turmoil. Large events at previously paid-for venues were canceled. Non-essential factories stopped making the parts to be delivered under global supply chain contracts. Restaurants and retailers cut back hours of operations or shut down entirely, sending ripples through contracts in place to deliver what they needed to conduct normal business.
Suddenly, the million-dollar contract question of the new decade is: will parties be excused from contract performance during the COVID-19 crisis under “act of God” concepts and force majeure clauses?
Defining “Acts of God” & Force Majeure
Haven’t read that boilerplate “act of God” clause in your standard contract template in years? Wishing you hadn’t snoozed through the force majeure lecture during law school? Well, here’s your opportunity to bone up on relevant definitions and governing law. The COVID-19 crisis is just starting what promises to be a huge rolling wave of force majeure claims in contract litigation for years to come.
Force majeure clauses are contract provisions that excuse parties from performing obligations when certain unforeseen and unavoidable events happen. These events can’t be caused by a party in these provisions. When businesses include force majeure clauses in their contracts—also known as “acts of God” protections—they typically refer to catastrophic weather events or wars. Though some lawyers include pandemics or epidemics in the definition in their contracts.
Parties will invoke this clause to claim that they should be excused from performing certain aspects of a contract because the unforeseen event made performance impossible. It was out of their control, they will say. For example, a factory might claim that they couldn’t deliver the stipulated number of widgets under a contract because they had to shut their factory down as a non-essential business under their state’s emergency laws.
Even if a contract lacks a force majeure clause, a party may still make claims under common law principles of impossibility or impracticality to avoid liability for non-performance.
Is COVID-19 an “Act of God”?
Contracts typically stipulate the state law that will govern any disputes that arise under a contract. Thus, we are about to witness state courts across the U.S. determine whether the COVID-19 crisis constitutes an “act of God” excuse under masses of contracts. There is a fair degree of variability across states on what constitutes an “act of God”, and how force majeure clauses are interpreted by courts.
In general, courts will look at several factors when making judgments on COVID-19 force majeure claims. Those factors include:
- Whether the COVID-19 pandemic qualifies as a force majeure under the specific contract language
- Whether the party seeking excuse from performance could have foreseen or mitigated the impact of the pandemic
- Whether performance is actually impossible under the COVID-19 crisis
Implications for COVID-19 Litigation
Many litigants will surely head to court to argue their positions on the invocation of force majeure in the coming months and years. There will also be many cases involving insurance coverage claims for harm caused by non-performing contract parties during the COVID-19 business disruptions. But lawyers will need to take preliminary steps and prove several elements if they represent clients in COVID-19 force majeure cases.
Contract vs. State Law
The first step, of course, is to ascertain if there is a force majeure clause in the contract. Lawyers will then need to determine which state law applies and if there were any agreements on dispute mechanisms such as arbitration clauses.
Next up—research the relevant laws and case law in the relevant state. Careful study of the actual force majeure clause language on triggering events will be crucial. Some clauses are very complex, and enumerate the types of “acts of God” contemplated in the force majeure clause. If pandemic or epidemic are not included in such a specific list, it could make prevailing more difficult. A court may think that if the parties took the time to detail the types of events they consider “acts of God” and did not include a pandemic/epidemic, then they did not intend that event to be included.
Cause and Effect
Lawyers will have to convince courts that the COVID-19 crisis caused their client to be unable to perform their obligations under the contract. Experts suggest businesses keep detailed records on the circumstances that prevented them from executing under a contract.
The courts will also determine the effect of COVID-19 crisis on the obligation. In some instances, the performance may be entirely excused. In others, the duty to perform may simply be suspended and deferred until it can be performed under the contract if practical.
Lawsuits Might not be the Answer
Especially with the whole world dealing with the fall out from this crisis, you may want to advise clients to try to work something out with the non-performing party instead of bringing a lawsuit. There may be a way for your client to perform in some lesser or later way that can preserve the business relationship for business opportunities going forward.
Virtually every business across the globe is being impacted by COVID-19. As such, both parties to a contract are likely finding themselves in a pinch with their own operations and other contracts. This may lay the foundation for mutual understanding on difficulties in performing during the COVID-19 economic crisis, creating room for a negotiated settlement.
Expert Witnesses for Contract Litigation
For further contract analysis, it’s prudent to consult with a contracts expert or breach of contract expert. They can lend further insights into the specific clauses within a contract and explore further options. An expert with experience in insurance contracts will be especially helpful in negotiating with an insurance provider.