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Environment & Energy Report

Coronavirus as an Act of God: Force Majeure Clauses Explained

March 27, 2020, 12:00 PM

Companies affected by Covid-19 are looking to contract terms to minimize their financial losses as the pandemic forces closures and cancellations, and craters productivity in many industries.

Business contracts often include force majeure protections that let parties off the hook for obligations that go unfulfilled thanks to “acts of God” and other events beyond their control. Force majeure is French for “superior force.”

The clauses could prove a saving grace for some companies amid the chaos, but lawyers must comb through contracts carefully to determine what’s covered and what’s not.

1. What Is Force Majeure, and How Is it Used?

Force majeure clauses excuse companies (or other parties to a contract) from meeting certain obligations when events beyond their control interfere with their ability to hold up their end of the bargain.

If invoked, the clauses can relieve companies from commitments, temporarily or permanently, without being in breach of their agreement.

For example, a shipper’s contract with a buyer might include force majeure protections to account for potential disruptions from a natural disaster.

2. Does the Coronavirus Pandemic Qualify?

It depends on the wording.

Contracts that include force majeure provisions tend to spell out qualifying events, often listing natural disasters, war and unforeseen government actions. They sometimes also include pandemics, epidemics, and broad “catch-all” language for events beyond a party’s control, a recent article for the American Bar Association said.

Contract terms are interpreted narrowly under U.S. law, meaning businesses whose contracts include explicit language about epidemics will have the most success bowing out of their obligations without penalty.

But the Covid-19 pandemic could also fall under other categories of protected events, Akerman LLP attorneys said in a recent client note, explaining that “stay at home” orders that halt or slow a company’s work could qualify as unforeseen government action under some force majeure definitions.

3. Is it Easy to Invoke Force Majeure?

There’s more to it than saying the magic words “coronavirus” or “act of God.”

Contract interpretation is often governed by state law. In some jurisdictions, businesses must be able to demonstrate that disruptions to their work really were beyond their control, and that they couldn’t have figured out a work-around.

In other jurisdictions, they must also show that the problem wasn’t foreseeable—a standard that could make it tougher to invoke force majeure in contracts finalized after the coronavirus outbreak gained steam as a global problem.

4. What Are Businesses Doing So Far?

Some retailers have referred to the protections while notifying landlords they can’t pay rent. At least one health system has invoked force majeure. And some companies are using the provisions to seek temporary relief from enforcement settlements with federal regulators.

Efforts to use force majeure are likely to cause a wave of litigation between contract parties.

5. Are There Other Options for Contract Relief?

Businesses whose contracts lack protective force majeure language may have some other avenues to avoid the consequences of breaching a binding agreement.

Other rules of contract law sometimes let parties off the hook if changed circumstances render an agreement worthless or make it impossible for a company to follow through.

To Learn More:

—From Bloomberg Law:

Coronavirus Threatens to Flood Courts With Contract Disputes

Companies Asking EPA for ‘Act of God’ Extensions Due to Virus

INSIGHT: Coronavirus and Contracts—Force Majeure Redefined

—From Bloomberg News:

U.S. Retailers Plan to Stop Paying Rent to Offset Virus

To contact the reporter on this story: Ellen M. Gilmer in Washington at egilmer@bloombergenvironment.com

To contact the editor responsible for this story: Gregory Henderson at ghenderson@bloombergenvironment.com

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