The disruptive effects of a global pandemic are all too real today considering social distancing and stay-at-home order requirements imposed to mitigate the spread of Coronavirus and COVID-19. These mitigation efforts have resulted in transitions to distance learning, closures of non-essential businesses and delays of construction activity, just to name a few. And, the effects are undoubtedly felt in all aspects of daily life for individuals, families, employers, and business owners. Of increasing concern is how this global pandemic will impact contract obligations and the duties imposed thereunder. Because a global pandemic is not typically contemplated when executing a contract, the parties may look to the force majeure clause, if the contract includes one, to determine how to proceed.
What is a Force Majeure Clause?
A force majeure clause seeks to address the parties’ rights and obligations under the contract if events beyond the parties’ control occur. Specifically, these clauses typically dictate that neither party is in default nor liable for damages for any failure to perform caused by an act of God, force of nature, strike, war, act of terrorism, insurrection, or governmental regulatory action. Although not often invoked, examples of a force majeure event may include a hurricane destroying a contracted-for construction project or a longshoremen strike delaying the importation of contracted-for goods.
Is a Pandemic a Force Majeure Event?
It depends. While pandemics are not typically provided for in force majeure clauses, some jurisdictions and parties may have include pandemics, epidemics, quarantines or other health crises explicitly. Courts interpret force majeure clauses narrowly, and some jurisdictions require explicit reference to the force majeure event. Therefore, if a pandemic is not specifically included, a court may not excuse delayed performance.
Depending on the industry, government regulatory action may be a more applicable force majeure event. Interventions by the federal government through travel and import restrictions may be the most compelling arguments for invoking a force majeure clause that does not explicitly include pandemics, epidemics, quarantines or other health crises.
It is possible, however, that pandemics may become standard force majeure language in all jurisdictions. For example, after the September 11th terrorist attacks, New York real estate leases and contracts incorporated acts of terrorism in force majeure clauses. The inclusion of such acts as force majeure events is now standard.
How do Courts Analyze Force Majeure Clauses?
When a force majeure clause is invoked in a contract governed by Kentucky law, the court performs a three-step analysis. First, the court inquires whether there has been an event that meets the definitions within the contract’s force majeure clause. Second, the court determines whether the event was reasonably beyond the control of the party in default. Finally, the court considers whether the party in default could have continued performance, without unreasonable cost or expense, despite the force majeure event. Ky. Utilities Co. v. South East Coal Co., 836 S.W.2d 392 (Ky. 1992).
If the party in default satisfies these three elements and the court finds that a valid force majeure event did occur, the party in default may not be liable for damages. However, most jurisdictions, including Kentucky and Ohio, do not consider adverse economic conditions as a qualifying force majeure event. Courts will not excuse performance because it has become “difficult, burdensome, or economically disadvantageous.” Stand Energy Corp. v. Cinergy Servs., 760 N.E.2d 453, 457 (Ohio Ct. App. 2001). Therefore, it is unlikely that courts will accept the economic conditions cause by the spread of Coronavirus and COVID-19 as a valid force majeure event.
What to do Going Forward
Review the contract and determine whether it has a force majeure clause and, if so, what that force majeure clause specifically includes. If performance can continue despite a force majeure event, the parties may nevertheless want to renegotiate the terms of performance if the terms would adversely and materially impact the purpose of the contract.
Whether or not there is a force majeure clause, performance may be impossible. In that event and where able, the parties should consider either amending the force majeure clause or renegotiating the terms of the contract. Considering that courts interpret force majeure clauses narrowly and a majority of courthouses are closed except to emergency issues, amending or renegotiating may be preferable to terminating.
Absenteeism and loss of productivity caused by stay-at-home orders, illness, or family responsibilities are just two of the critical issues created by the spread of Coronavirus and COVID-19. If pandemics, epidemics, quarantines or other health crises do not become standard force majeure events, the parties may elect to include such events in future contracts in light of this current health crisis and in preparation for any future health crisis.
*Rebecca McDonough contributed to this article.
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