The Application of Force Majeure Clauses in the Context Of COVID-19

By Robert J. Lum

The recent novel coronavirus, also known as "COVID-19," has caused uncertainty and panic across the globe. Compounding to the confusion is whether the COVID-19 pandemic triggers a clause common in most contracts known as "Force Majeure," which may enable parties to either cancel or suspend their existing contracts. The answer to such inquiry depends on the parties' contract and the facts of each case. Each particular case is separate and distinct, and no two cases are similar. Although force majeure is a common contract term, it is not given the attention it deserves during the negotiation stages of the contract. Instead, parties often draft boilerplate force majeure clauses or utilize samples contained in template contracts which are not tailored to their respective transaction and agreement. This lapse may lead to problems if a disruptive event calls for a force majeure defense, but the parties did not carefully negotiate and draft such term into their contract. With the looming COVID-19 pandemic, force majeure is in the spotlight.

Applicability of Force Majeure in the Lens of COVID-19

Force majeure is a valuable tool which allows parties to be released from their contractual obligations if performance under their contract becomes impractical or impossible due to events beyond their control, such as the occurrence of the COVID-19 pandemic. In New York, the Courts require that the parties, prior to entering into their contracts, contemplated for an event that amounts to that of COVID-19 which would allow either party to terminate and/or suspend the contract. To demonstrate that COVID-19 was contemplated for, the party invoking force majeure must show that the contract specifically included the disruptive event causing the party's inability to perform or that the event falls within a similarly general disruptive event contemplated for in the contract. See Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 903 (N.Y. 1987) (finding that the parties' recited events in the force majeure clause to the parties' contract pertained to a party's inability to perform day-to-day commercial operations but not a party's inability to obtain and maintain insurance, therefore, force majeure was inapplicable). If the parties failed to include a force majeure clause in their contract, then no force majeure may be invoked as a defense. See General Elec. Co. v. Metals Resources Group Ltd., 293 A.D.2d 417, 418 (1st Dept. 2002) (where the parties' agreement contains no force majeure provision, there is no basis for a force majeure defense.).

In some situations, a party’s performance may be excused because the coronavirus pandemic was contemplated for as a disruptive event, and therefore falls within the scope of the force majeure clause, by using the contract's use of the word "epidemic." See Wyndham Hotel Grp. Int’l v. Silver Entm’t, No. 15-CV-7996 (JPO), 2018 U.S. Dist. LEXIS 52144, at *27 (S.D.N.Y. March 28, 2018) (quoting force majeure clause that includes “epidemic” as an example of force majeure event). First, an inquiry is made into whether the coronavirus pandemic was reasonably foreseeable by the parties prior to signing their contract. This goes back to the condition that the parties must have contemplated for this disruptive event. If the Courts find that the event was foreseeable, then force majeure is inapplicable. Conversely, if the Court finds that the disruptive event was not reasonably foreseeable, then the force majeure may be applicable if the coronavirus pandemic renders a party's performance under the contract impossible or impractical. However, if performance is still possible or practical notwithstanding the disruptive event, then force majeure cannot invoked. Whether the parties may terminate or suspend a contract depends on what the force majeure clause states therein. Some force majeure clauses may not excuse a party’s performance and contractual obligations entirely, instead, it may only suspend performance during the force majeure event. It is up to the parties to specifically enumerate the acts which could conceivably excuse performance under force majeure. A party invoking force majeure must still be able to show that it took steps in trying to perform its contractual duties notwithstanding the event preventing or hindering its performance.

It is important to note that not all construction contracts specifically contain the words "force majeure," most of them do contain a clause that provides a similar relief. For instance, AIA A201-2017 § 8.3.1 grants a contractor an time extension for events causing delays to the construction schedule such as labor disputes, unavoidable casualties, and weather conditions. While a force majeure event may allow an extension of time to the construction schedule, it generally does not grant a contractor the ability to recover losses or damages resulting from the disruptive event. Avoidance of boilerplate language and template contracts is essential in that respect. Accordingly, careful drafting of the force majeure clause is important, and the parties must be cognizant of all disruptive events that might occur during the construction project.

Lastly, a force majeure clause may contain a notice provision which requires the party invoking the force majeure clause to give clear notice to the other side. Although most notice periods are between 5 to 10 days from the time of an event, each contract, however, is different. From a tactical standpoint, a party intending to use force majeure must ensure that a disruptive event falls within the scope of the clause.

Legal Implications on the Construction Industry

The novel coronavirus pandemic is already adversely impacting the construction industry. Some of our clients who are in real estate development have asked us whether they may invoke force majeure because their general or subcontractors were fearful for their safety and health, and therefore, refused to show up for work. The answer depends upon whether there the construction contract stated a force majeure event which included a COVID-19-like event and whether the contractors' absence prevented performance under the contract. If the answer is yes, then force majeure may be a successful defense, depending on the circumstances. Conversely, if the contractors merely refused to work, there may be an argument made that force majeure is inapplicable because their refusal constitutes a difficultly, but not a complete impossibility, in performing under the construction contract. Mere impracticality, unanticipated difficulty, or financial hardship, is generally not enough to excuse performance. Notwithstanding the fact that the World Health Organization has labeled COVID-19 as a pandemic and governments around the globe are mandating shelter-in-place, it is still important to document how such recent events have impacted your contractual obligations. See Reade v. Stoneybrook Realty, LLC, 63 A.D.3d 433, 434 (1st Dept. 2009) (finding that a court's restraining order constituted "governmental prohibition" in the parties' force majeure clause).

Given that the with its rapidly evolving coronavirus has caused governments to take defense measures to prevent further spread thereof by curtailing normal societal functions such as an order for a shelter-in-place and closing all non-essential businesses, it will be interesting to see how the courts will view force majeure clauses in this context. While the application of force majeure in light of the unprecedented pandemic is uncharted territory, we can use history as a lesson on the importance including force majeure in contracts and how a party may relied upon it to either suspend or terminate its contractual obligations.

In 2004, the Ebola crisis in West Africa caused some companies working on the ArcelorMittal expansion in Liberia, for highly profitable iron ore mines, utilized force majeure as a defense to non-performance on their contracts and withdrawing operations from the region. There, 15 contracting companies working on the ArcelorMittal expansion declared force majeure and evacuated a total of 645 employees from the region due to the Ebola outbreak. Other companies operating in the region also implemented preventative measures by ceasing operations in and near the virus-stricken zone. Airlines such as British Airways PLC canceled flights to West Africa, and mining companies cut back on nonessential travel to the region. With that said, the aforementioned Ebola crisis, including other pandemics such as H1N1 and MERS, is similar to our present day situation in that there is a prevailing trend of society curtailing non-essential activities when faced with an deadly virus outbreak. The trend further magnifies the need of a force majeure clause in each contract.

Takeaways

1. A force majeure is an event relieving a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated

2. The event must be one that can be neither anticipated nor controlled that may arise from acts of nature (such as floods and tornadoes) or of people (such as riots, strikes, and war), and may include the current COVID-19 pandemic

3. A force majeure clause must include the COVID-19 pandemic as an event that is claimed to have prevented a party's performance

4. The excuse is available only where the parties' reasonable expectations have been frustrated due to circumstances beyond their control

5. A notice provision is important to set the parties’ expectations as to the time frame in which the relief granted by force majeure begins to apply