FORCE MAJEURE PROVISIONS IN THE ERA OF COVID-19
May 20, 2020 Posted By Beth Rex and Scott Laird COVID-19
On March 11, 2020, the World Health Organization (“WHO”) officially declared CVOID-19 a pandemic. Prior to March 2020, the last time the WHO declared a pandemic was in 2009 during the H1N1 outbreak. The COVID-19 pandemic has been affecting performance of contracts from rental agreements to complex construction contracts. Most of these agreements contain Force Majeure clauses or other provisions that address the impossibility or impracticability of performance and determining whether a contract will be voided or enforced in today’s era of uncertainty will likely be made on a case-by-case basis. These issues are often resolved through litigation. A Force Majeure is an event beyond anyone’s control, which renders performance under a contract impracticable or impossible. If you or your client has a contract in which the ability to perform has been affected, there are a number of important things to keep in mind, and the most important things are decide on what you want, act quickly, and be flexible.
First, be cognizant of the fact that each party to an agreement has an economic stake in it, and the finders of fact will look for equitable resolution in making determinations based on the facts and circumstances. To that extent, it is likely that more flexibility will extend to a lay person that entered into a wedding contract than to two sophisticated business entities that contracted to build a 60-story high rise. In addition, the date the parties entered into contract is pertinent in this era of COVID-19. Parties that entered into a contract in the fall of 2019 had no idea of what was around the corner, while parties who entered into contracts in January of 2020 may be held to have thrown precaution to the wind because there was some inkling of what was to come, and parties that entered into a contract in February 2020, or later, had concrete knowledge of the spreading pandemic.
A typical Force Majeure provision will contain the factors necessary for it to be enforceable. It will list the enforceable events, such as natural disasters, acts of God, acts of war, and acts of terrorism, and perhaps even medical epidemics. Whatever the event is being relied upon, it must have been unforeseeable, beyond the parties’ control, and it must make performance under contract impossible, impracticable, or even illegal. Even if there is no Force Majeure clause in an agreement there may be similar language addressing the impossibility of performance, and if not, there are common-law doctrines of impossibility and frustration of contract that can be invoked as well.
Valid reasons for invoking a Force Majeure clause or otherwise establishing an inability to perform in the era of Covid-19 are numerous. Can the contract not be performed because of governmental regulations restricting the number of persons who can occupy the same space? Is there a lack of public transportation or limits on traveling? Is it impossible to maintain social distancing? Is the purpose of the contract thwarted? Next, while the parties may be excused from performance, it may be that performance is delayed, not that the contract is voided, so you must ask for how long the disability will exist, and when there comes a time the ability to perform will be restored, will it be the same or different? Leasing a convention center for a boat show to be held in June is different than Airbnbing an apartment in Tokyo during the Olympics because the boat show can be held next June, but the Tokyo Olympics were cancelled. With the boat show there is still a purpose so performance can be delayed, but while you may still be able to rent the apartment in Tokyo, the purpose of renting it is gone. You may be legally able to open your bar in July, but social distancing will still be in effect so the purpose will be different, and arguably impracticable.
Once a party decides to invoke the Force Majeure clause, that party must give timely written notice setting forth the basis for invoking the clause. Delay in giving notice because you are waiting to see what happens can void enforceability. For example, if the bar owner who had to cease operations in February waits until June to see if restrictions are lifted only to find they were not then attempts to invoke the clause, it may be too late.
Also keep in mind, especially with sophisticated business entities, economic loss alone is generally insufficient to invoke the Force Majeure clause. A developer who enters into an agreement to develop a condominium complex than runs into financial difficulties because construction is delayed, materials are more expensive or buyers are not buying will likely be held to its contracts because there is always a risk on economic loss in these types of projects. Therefore, do not focus your argument solely on economic loss.
Many Force Majeure provisions delay enforcement of performance during the period of disability, but the obligation to perform resumes after the disability ends, and if there are effective dates, such as in a lease, the lease term might be extended for the amount of time performance was not possible because of the disability. Indeed, many commercial leases in New York contain Force Majeure provisions or other similar provisions regarding impossibility of performance, and some may even specifically mention pandemics as an enforceable event.
With the enactment of PAUSE by New York Governor Andrew Cuomo on March 22, 2020, all “non-essential” businesses were ordered to close, resulting in a great number of commercial establishments closing until further notice, rendering it not only impossible, but also illegal for them to operate.
In addition, “non-essential” construction was halted in New York. This means that general contractors cannot keep projects on schedule. However, a delay in performance under a construction contract could very well be excused by providing a general contractor with additional time to complete the project.
In sum, the future is uncertain and what the courts or other triers of fact will do is equally uncertain. Therefore, if you or your client want to invoke a Force Majeure clause, be certain of the circumstances necessary for performance to be excused or delayed; consider options available such as mediation and arbitration, and be flexible. Compromise, liquidated damages, or other incentives may be in order.
French & Casey, LLP is available to assist you with any Force Majeure or other issues arising from the inability to perform under contract or agreement because of the Covid-19 crisis. Please contact Beth Rex at email@example.com or Scott Laird at firstname.lastname@example.org to discuss any of the foregoing or for more information.