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INSIGHT: Coronavirus and Contracts—Force Majeure Redefined

March 12, 2020, 8:01 AM

Manufacturing plant closings, music concerts cancellations, conference postponements, and travel industry cancellations are announced almost daily in light of new coronavirus worries and involve immediate and possible long-term financial ramifications and supply chain issues. Who shoulders the risk of loss? This is where “force majeure” comes into play.

Many contract agreements completely fail to address the concept, but the savvy negotiator insists on building in “force majeure” exceptions to performance under the contract. Fundamentally, a force majeure event is an unforeseen or unavoidable event beyond the reasonable control of the parties to an agreement that serves as an excuse or delay in the affected party’s performance of its obligations under the agreement.

Such clauses allow the parties to a contract to better allocate risk and obligations in the event of force majeure events. The usual events covered in such clauses are (i) “acts of God”—e.g., an earthquake, hurricane or other natural disaster, (ii) acts of terrorism, and (iii) labor strikes or inability to procure labor or materials, and typically, the financial inability of a party is excluded from the definition of force majeure.

Clearly, these are events that are out of the control of the parties. The most basic version of a force majeure clause excuses the parties from their obligations. For example, a contract between a concert promoter and a band might include a provision that excuses the band from its obligation to perform and the promoter from its obligation to pay a fee upon the occurrence of a force majeure event.

When Boilerplate Isn’t Enough

But, how often do force majeure clauses address the issue of a pandemic? In the current climate and worldwide response to Covid-19, parties are undoubtedly finding themselves unable to perform under binding contracts, no fault of their own. But, is their failure to perform excused under the force majeure clause?

Part of the challenge lies with the fact that there is no universal standard definition for force majeure, and they often vary across industry agreements. They are often taken for granted and considered boilerplate in those agreements that even include such clause, and usually only evolve over time in response to events such as the current Covid-19 outbreak. At that point, it may the too late and the affected party would have to deal with the fallout.

While certain “boilerplate” clauses are almost typically standard across agreement type and industry, force majeure provisions take on different characteristics depending on what sort of agreement is in place and the industry involved. The performance of one party might be completely excused by one force majeure provision, while under another, the contract might defer performance of the obligation until the force majeure event ceases, and yet another may require strict performance of the obligations or face penalty.

Further complicating matters is the fact that force majeure provisions are not entirely clear and do not typically list public health crisis, or wide spread disease, infection or pandemic as excusable force majeure events. That is where creative arguments and legal advocacy will be critical in creating the best interpretation of the provision to support a force majeure defense.

Precise Language Essential

Commercial leases typically include force majeure provisions. A common version of such a provision in a commercial lease might read as follows: “Any deadlines or requirements to perform obligations in this Lease (other than financial) which cannot be met because of delays caused by governmental regulations, inability to procure labor or materials, strikes, acts of God, or the occurrence of other events beyond the control of Landlord or Tenant (“Force Majeure”) shall be extended by the amount of time caused by such delays.”

This is a more narrow version of the force majeure provision that both carves out financial obligations (i.e., the tenant’s obligation to pay rent must continue notwithstanding what else might be occurring in the world) and the remaining obligations under the lease are never excused, but only delayed, to the extent the occurrence of one of the defined force majeure events.

While a landlord or tenant’s inability to obtain materials to fulfill its obligations to perform certain work under the lease could squarely fall under this force majeure provision, what happens if we get to the point that retailers are closing their doors as has occurred in Wuhan, China, and parts of Italy? Will the tenant who typically has a continuous operations covenant under its commercial lease be in default? Again, thoughtful arguments will have to be made in order to assure the tenant benefits from the force majeure protection and is not held accountable in such occurrence.

Even in the most elaborate agreements that include the term “pandemic” or “public health crisis” in the force majeure provision, at what point can the party claim that a pandemic or public health crisis has occurred? Must it be one of global scale declared by the World Health Organization like on March 11, or would a state governor’s declaration of a state of emergency (which has occurred in Washington, Maryland, California, and Utah as a result of the uncontained spread of Covid-19) suffice? Or must a local, state or federal agency determine that there is a public health crisis. As such, many parties are going to be left wondering if and when their force majeure clauses will offer them protection.

Without incredibly specific force majeure language, there is no bright line test as to what actual point in time in the midst of a global outbreak like the type currently upon us triggers any force majeure protection. Unfortunately, vague statements by officials trying to quell public unrest in the face of a crisis may leave a contract party guessing and left to rely on some future interpretation of a court.

No doubt, much litigation will follow in the coming weeks and months, as some parties attempt to bootstrap themselves under force majeure clauses while others demand performance or recourse.

Many lessons will be learned from the Covid-19 catastrophe. One more to add to the list going forward—don’t relegate your force majeure provision to immaterial boilerplate. And, the more precisely a contract drafter describes the triggering events, and the more triggering events included, the more protection and clarity there will be for parties to those agreements.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Anita Sabine is a partner in Manatt’s Los Angeles office and leads the firm’s real estate transactions and finance practice. She represents owners, operators, lenders, developers, investors and others in a range of financing, development, leasing and investment-related transactions.

W. Joseph Anderson is a Manatt entertainment attorney in the firm’s Los Angeles office. His practice focuses on the “creative entrepreneur” and the corporate and intellectual property transactional matters that artists and individuals working in entertainment and media ventures encounter.

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