The novel coronavirus pandemic is causing unprecedented damage to human health as well as business operations around the world. As the impact continues and economic fallout mounts, more industries will be impacted; the lockdowns and restricted movements are likely to continue in the foreseeable future.
Consequently, companies need to assess not only their own, but also their counter-parties’ contractual rights, obligations and remedies in case of delayed performance, or when it becomes difficult or impossible to carry out contractual obligations. A careful analysis of the rarely invoked “force majeure” clause is critical in these uncertain times.
As per the Black Law Dictionary, the term “force majeure” is “an event or effect that can neither be anticipated nor controlled. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.” These may include events such as acts of God, war, terrorism, earthquakes, hurricane, as well as acts of Government, fire, plague, or epidemic. Where the term epidemic or pandemic has been used, that will clearly cover Covid-19.
In line with the laws of many states, the clause of “force majeure” will be triggered only where the clause explicitly includes contingent event. Where a force majeure clause clearly uses terms such as “diseases”, “epidemic”, “pandemic”, “act of government” or “state of emergency”, depending on the enlisted circumstances, parties will assert force majeure as a defense to non-performance or anticipatory breach in cases related to the Covid-19 pandemic.
Act of God?
The burden of proving an event was beyond their control and did not happen because their fault or negligence lies solely with the parties seeking to assert the clause of force majeure. The burden of proof will not be difficult in the contracts that list out specific events like viruses, epidemics, or pandemics. But implementation may get complicated when the force majeure clause is not explicit and simply uses the term “Act of God” which can act as a boilerplate for many force majeure clauses.
Nearly all attempts to define the phrase “Act of God” use words such as “extraordinary,” “unusual,” “sudden,” “unexpected,” “anticipated,” or “grave.” The appearance of one or more of these adjectives in almost every definition reflects the requirement that for a casualty or phenomenon to qualify as an “Act of God”, it must have been so unusual or abnormal that it could not have been predicted or anticipated.
It will be interesting to see how courts will ultimately determine that Covid-19 is an “Act of God”. Expect many court filings in the months and years ahead to echo the sentiments of the World Health Organization Director-General Tedros Adhanom, who recently said: “We are in unchartered territory. We have never before seen a respiratory pathogen that is capable of community transmission, but which can also be contained with the right measures.”
As the coronavirus pandemic brings unprecedented challenges, it’s also sure to disrupt countless contractual relationships. Parties should therefore be ready to invoke and defend against force majeure clauses and related doctrines that may arise to excuse performance.