Covid-19 (Coronavirus), Contract Obligations, and the Force Majeure Clause
March 16, 2020 • 3 min read
by Buckingham Partner, Lucas Murray
In the wake of various state and federal orders aiming to protect the general public from the coronavirus – which includes Ohio Department of Health’s Director’s Order recently announced prohibiting onsite consumption of food and beverages in the state and the CDC’s recommendation to limit gatherings below 50 persons – businesses, especially small business owners, look for avenues to reduce the negative economic impact of such orders.
An often overlooked “boilerplate” provision known as “Force Majeure” may excuse or suspend certain contract obligations, however contingent upon the specific language in each contract. These provisions can apply to otherwise enforceable obligations to sell or purchase goods or services. The contractual provision need not actually use the words “Force Majeure” to be effective.
Force Majeure is a very old and well established contract provision that excuses the performance of a party from its obligations when performance becomes impossible or impracticable, due to an event that such party could not have anticipated or controlled. Said events typically include natural disasters (hurricanes, tornados, floods, etc.), war, terrorist attacks, government regulations, labor strikes, and acts of God or Nature. But does a particular Force Majeure clause include a pandemic like the Covid-19?
The answer: it depends.
Business attorneys who typically draft Force Majeure provisions usually take one of two approaches, (1) a finite and specific list of events, or (2) an unrestricted list of events.
In the event the drafters choose a finite list of events, then either ‘epidemic’, ‘pandemic’, or ‘quarantine’ would arguably include Covid-19. Subsequent governmental action related to Covid-19 including changes in laws, regulations, executive orders, or embargoes (i.e. Ohio Health Department Director’s Order), if listed in the Force Majeure provision may also provide a suspension or excusal.
A Force Majeure provision may include phrases such as “including” and “including without limitation” or the phrase “other similar events beyond reasonable control of the impacted party”. Business attorneys often include catch-all phrases like, “Acts of Gods” or “Acts of Nature”, as another way to expand the scope of the provision. Standard rules of contract interpretation may impose restrictions on how a court rules on a broad term like ‘Acts of God’ or ‘Acts of Nature’ and whether it excuses performance to avoid a breach of contract. Often, a Court will examine the list of words which precedes the catch all term to determine what the parties intended by the broad term. If the Court takes this approach, it may narrow the scope to only cover events similar to the events specifically listed in the provision, or to events that the parties may have been aware of when negotiating the contract (i.e. contracts entered into after the initial onset of Covid-19). As in all contract disputes, questions of fact and law play an important role in the final outcome. The nature and orientation of the judge and the trier of fact (judge or jury) will influence the outcome. That is where good commercial litigators can make all the difference.
In any event, given the recent spread of Covid-19 and local, state, and federal governments’ response to Covid-19, business owners and chief executive officers must be well aware of their contractual rights, obligations, and their abilities to avoid and/or suspend performance in order to limit loss and long term damage to their business. As such, Force Majeure provisions will likely be scrutinized in existing agreements and more aggressively negotiated in future contracts. There can be no doubt that the choice of language included in a contract will have a real world effect on the parties’ duty to perform and ability to weather this economic storm.
Now is a good time to have your attorney review any Force Majeure clause that might appear in your contracts, as well as review with you additional contract principles that may offer similar or additional benefits to the extent the Force Majeure clause does not (i.e. principles of impossibility, impracticability, and frustration of purpose), and to shore up that language in future contracts, including your Standard Terms and Conditions.
Lucas Murray is a business attorney who advises his clients on a broad spectrum of matters, from mergers and acquisitions and employment agreements, to contract negotiations and commercial transactions. Whether a client is forming an entity for the first time, expanding an existing company, or transitioning its business to the next generation of leaders, Lucas is committed to helping his clients navigate complex laws and implement strategic solutions so they can make decisions that are best for their business.
About Buckingham, Doolittle & Burroughs:
Buckingham is a corporate and litigation law firm that counsels Middle Market executives and business leaders all over Ohio and beyond. With offices in Akron, Canton and Cleveland, Buckingham offers clients sophisticated and practical legal services. Serving the region for over 100 years, Buckingham’s mission is to deliver meaningful experiences through the practice of law, exceed expectations in terms of service, counsel and business sense, and to offer continuous value to the industries, communities and clients they serve. Visit bdblaw.com to learn more.
