Knowledge and Insights
While business owners attempt to find creative ways to protect their assets and operate during the Coronavirus (COVID-19) pandemic, one term that keeps creeping into conversation as it relates to contracts and leases is force majeure. Force majeure is a French phrase meaning a superior force. Sometimes referred to as an “act of God,” force majeure is often invoked in response to natural disasters, such as hurricanes or tornados. A force majeure event may legally excuse a party’s performance in whole or in part, protecting that party from a breach claim. Since the World Health Organization (WHO) officially deemed COVID-19 a pandemic and government-mandated closures are being enforced as a result, many are considering the potential of this pandemic in connection with a force majeure issue.
There are some force majeure provisions that specifically include pandemics as one of the triggering events. The WHO ultimately decides whether and when an illness reaches a pandemic level. Therefore, based on the WHO’s recent declaration, a contract containing a force majeure provision excusing performance due to an epidemic or a pandemic could relieve a party of its performance obligations under the contract. Although, some force majeure provisions include additional requirements, such as the length of time the pandemic event lasts, or when, in relation to your contract performance, the declaration of a pandemic must be.
Some force majeure provisions may not explicitly list examples, stating only that a party will be excused for nonperformance due to unforeseeable events arising through no fault of its own and beyond its reasonable control. In all likelihood, a party attempting to use such a clause to excuse its nonperformance or delay in performance due to COVID-19-related circumstances will still have to convince the court that it attempted to carry out its performance, but was unable to do so without incurring unreasonable expense due to the pandemic. Whether COVID-19 constitutes an “act of God” will likely depend on the jurisdiction of the contracting parties. If the provision is less specific or includes many different types of examples, it might be easier to argue that COVID-19 falls within this category.
Parties may be able to argue that delays or suspension of performance may fall under force majeure because of government action. For some contracting parties, COVID-19 itself may not have a direct impact, but nonperformance may still result because of the recent actions taken by local, state and federal governments in response to COVID-19. Government actions such as travel bans, quarantines and the national emergency declared by President Trump may qualify as government action, but the specific application to the contract at issue will need to be analyzed by a qualified legal professional.
Given the disruptive effect the coronavirus pandemic has had on contractual performance around the globe, moving forward, contracting parties need to both anticipate and provide for these contingencies in their force majeure provisions. The first defense starts with proactively thinking about the ‘what ifs’ when entering a contract as well as comprehensive financial planning.
This recent outbreak has highlighted how poorly equipped certain businesses are to deal with sudden unexpected crises. In a fast-changing world, we rely on our decision makers to make good judgments, but this relies on them having a solid foundation, rapid access to relevant information and the authority to make real time decisions. How long can your organization operate ‘business as usual’ with little or no income? What practices are in place to stay ahead of a disaster/pandemic related shut down?
As financial professionals we are working side by side with our clients, advising them in making informed financial decisions for their business in this tumultuous time. Decisive actions taken now should include a plan to mitigate your losses as well as rebound during the recovery period. Together we can help build the systems and capabilities that enable decision makers of your organization to know what’s going on and the options available to them. In uncertain times, a fully-functioning, agile team is dramatically more productive than a traditional one. This is made possible through collaboration between business owners and financial advisors, the people who know your industry and business the best. If the force majeure clause in your contract becomes an issue in dispute, working with your attorney to retain an independent economic damages expert allows business owners to focus on running their business while their claim is being expeditiously managed by experienced professionals and the potential for recovery is maximized.
Mercadien’s Forensic and Litigation Support team has the skills and knowledge required to assist in your efforts to identify and quantify losses and support legal actions that might follow. If interested in learning more, please contact me at 609-689-2319 or firstname.lastname@example.org.
DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice, and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.