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Is COVID-19 Covered Under Force Majeure Clauses?

Is COVID-19 Covered Under Force Majeure Clauses?

April 23, 2020 | Coronavirus

When COVID-19 first began rampaging through China, the Western world got a taste of the disruption it would bring to businesses. Suddenly, supply chains went into lockdown, and manufacturers couldn’t get the materials they needed.

Now that the virus is on home soil in full swing, the further disruptions in supply chains and businesses due to quarantine and social distancing regulations are causing serious problems for many. Some entities are finding themselves unable to fulfill contractual obligations due to dangerous circumstances for employees, resource shortages, or federal distancing regulations. This is creating a conversation around a clause found in many contracts that could apply to the situation at hand: force majeure.

What is a force majeure clause?

A force majeure, or “superior force,” clause is a contractual provision that excuses one or both parties from performing their obligations. It goes into effect when unforeseen and unpreventable circumstances prevent them from fulfilling the agreement. The legal term “act of God” is often used to convey this type of event, which can include earthquakes, hurricanes, and other disastrous events.

A force majeure must be something widespread and beyond the control of either party. The clause should spell out the duties of each party, should circumstances qualify. Often the contractual obligations will not be nullified, but merely postponed until after the effects of the force majeure subside.

The precise terms vary from agreement to agreement. Typically, parties make provisions such as permission to extend deadlines, terminate deals, or allow extra time for performance milestones.

What we’re seeing across the world today seems like a strong example of a force majeure. We have a deadly virus on our hands, and governments have shut down entire economies to stop the spread. Many companies cannot go about their regular business, preventing them from honoring their obligations. Yet there is still debate as to whether this term applies to current circumstances.

Does COVID-19 apply under a force majeure clause?

Whether or not COVID-19 strictly falls under force majeure depends on the specific circumstances of the company, the precise terms laid out in their contract, and how the disaster affects them.

The COVID-19 pandemic is undoubtedly widespread, but it affects different entities and locations to varying degrees. Some companies have had to close down operations entirely, while others can continue by working remotely or selling online. Factors such as these matter when considering whether force majeure is applicable to a situation.

Some companies have already begun legal proceedings to excuse them from contractual obligations under force majeure. However, we don’t yet have sufficient legal precedent in the current situation to know what rulings will likely be decided. The courts may find that the current pandemic is indeed an exceptional circumstance that allows parties to activate force majeure terms. But, then again, they may not.

One of the most troubling issues right now is the fact that governments are often issuing “guidelines” and not actual laws on the statute. Typically, a case for force majeure would be strengthened by the government legally imposing travel restrictions, quarantines, trade embargoes, and business closures. But, in many cases, governments are strongly advising citizens to follow such measures, but not enforcing them, leading to some gray area in terms of what businesses have technically been mandated to do.

What circumstances have been covered by a force majeure clause in the past?

We have seen firms using force majeure clauses in other extreme incidents.

In 2010, for instance, the eruption of the volcano under the Eyjafjallajokull glacier in Iceland grounded many commercial flights throughout Europe. Airlines claimed force majeure, allowing many of them to escape the legal ramifications of failing to provide passengers with flights to their destinations.

In this case, it made sense for travel operators to claim extraordinary circumstances and renege on their commitments. The volcano directly impeded their ability to conduct their business, and there were no viable alternatives available. By contrast, it would not have been legally permissible for unrelated firms, such as retail outlets, to claim force majeure in their contract negotiations. They weren’t directly affected and could reasonably keep their doors open.

Many companies have also made force majeure claims in response to terrorist attacks. The destruction of property and closure of buildings following the 9/11 terrorist attacks prevented many firms in Lower Manhattan from making good on their contractual promises. So, ultimately, some had to break contract.

What are the legal ramifications of COVID-19?

For entities that have signed binding contracts, this epidemic is leading to significant legal confusion. From landlords and tenants left without payment or unable to pay to price gouging cases and more, the legal ramifications of the pandemic continue to arise. We haven’t seen anything like it in living memory in our country.

For that reason, firms need to consult with a qualified New York business litigation attorney like Napoli Shkolnik. As the legal issues around COVID-19 continue to unfold, specialists are available and ready to help businesses understand the legal effects the pandemic may have and determine whether a force majeure clause may be applicable to specific cases.

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