COVID-19 And Force Majeure: Creating Contracts For A New Reality

The disruptions caused by the COVID-19 virus, and subsequent business shutdowns and questions of liability to owners, operators, and employees, has revived the topic of force majeure in drafting new contracts or amending existing contracts going forward. Although the dangers of a virus may seem qualitatively different than those created by a hurricane, both are essentially the same for contractual purposes.

Foreseeability and Standard of Relief

Force majeure was formerly known as an "act of God" and is legal shorthand for any event that is beyond the control of the contracting parties. It has been expanded beyond the "act of God" definition of events of nature, to include acts of man, such as war, terrorism, or civil disturbance. Force majeure events all have in common that they render the contract impossible or impracticable to perform.

With any force majeure clause, the primary standard for an excuse of performance is whether the event was foreseeable. In cases of hurricane or earthquake, the event may be weather- or location-specific; but in the case of a virus, the foreseeability is less secure. A contract must include references to governmental action ("civil authority") or health and human services orders, which are more likely to impact the execution of the contract, rather than actual physical damage from the event itself.
Once the foreseeability is determined, the contract must also identify what, if anything, the parties are entitled to do if the event occurs. 

Typically, force majeure recognizes various degrees of the hindrance of performance, from minor delay to complete impossibility. In the case of a pandemic and complete government shutdown, the degree of impossibility is predicated on the duration of shutdown and determination of things like "essential business" as in the current state.
Any contract must, therefore, determine both the degree of foreseeability and the nature of the relief to be afforded.

Notice and Mitigation

In any contract, nonperformance clauses require some notice to the other party before nonperformance is allowed. Under force majeure clauses, notice is not waived merely because the event is of broad or governmental scope.
Force majeure clauses often require indemnification, which can be problematic in pandemic or civil authority situations, both due to the uncertainty of the duration of the shutdown, and the lack of insurance coverage for viral/bacterial lockdowns. Recognition of both these factors in advance of an actual catastrophe would prevent many issues before they arise.

Mitigation or prevention may well become critical in future pandemics, in interpreting force majeure clauses. Although "mitigating" an epidemic before it happens is perhaps the wrong term, contractual requirements for taking reasonable precautions to avoid contagions, such as routine sterilization techniques, requirements for PPEs, and sick-day plans, may need to be written into contracts in advance of any disaster.

Pandemic-Specific Riders

An alternative to consider is the "COVID-19 Specific Contract". Some industries, such as IT and outsourcing companies, have routinely written disaster-specific contracts as ancillary to their standard agreements. These contracts, or riders, only come into effect if the specified event comes into play. For IT, it might be a cyberattack or DDoS (directed disruption of service) attack.

Businesses likely to be significantly affected by a pandemic—service industries, shipping, hospitality—might wish to have a pandemic-specific contract written in the event that another COVID-19 outbreak occurs, or a similar business disruption requires large-scale lockdown.

Businesses have seen the chaos that a government shutdown can cause, and it behooves them to ensure that no legal liability attaches to them because of their obedience to government orders. This can be accomplished simply by planning and considering what might happen in the next such event, and how they want to proceed.

The blog posts provided on this website do not, and are not intended to, constitute legal advice; instead, all information, content, and materials available on this blog are for general informational purposes only.