Is Coronavirus a Force Majeure Event?

By Michael C. Kelley

Coronavirus (or COVID-19) is already causing significant disruption to businesses around the world, including quarantines and travel bans affecting trade and commerce, manufacturing, construction, hospitality and service industries in an unprecedented way. Now the disruptions are impacting society-at-large, from the closing of restaurants and attractions to remote work models for corporate staff members, “social distancing” and now even mandatory lockdowns in some locations. With this heightened sense of precaution (which is good) bordering on anxiety and panic (which can be very bad), it is crucial for businesses to apply the same level-headed approach to their dealings as they always have. The fact is that COVID-19 would likely not excuse non-performance or even cancel existing contracts, with very rare exceptions.

So what does the coronavirus mean for business, particularly in real estate development, finance and construction? How does it impact real estate transactions, acquisition and finance closings? Are you in breach if you cannot fulfill your agreement, even if your inability is linked to effects – even extraordinary government action – that are linked to COVID-19? While some may assume that the craziness of the pandemic excuses performance altogether, effectively canceling agreements, the reality is that, unless you are dealing with an extremely rare situation, any valid agreement is not simply canceled as a result of coronavirus. Businesses need to carefully review the language of their agreements, which may (or may not) provide for any relief – or the contracted relief may be challenged. And if the contract doesn’t have the right language, one cannot assume any certainty about the consequences of failure to perform.  More than likely, businesses are going to be expected to take action to fulfill their contractual obligations, and the failure to be proactive may end up costing them dearly. How folks need to treat and respond to what certainly appears to be a pandemic will in the vast majority of cases depend solely on the specific language of the contracts involved, including upfront contingencies agreed to by both parties, provisions granting certain relief to either party, and, the hot topic circulating the internet right now, “Force Majeure.”

What is a force majeure clause?

A force majeure clause is commonly included in commercial contracts, addressing what parties are supposed to do under certain defined force majeure (“superior force”) circumstances.  These are recognized events that prevent performance of contracts.  They are usually “acts of God” (earthquakes, floods, tsunamis) and certain disruptive, unplanned acts of people (war, labor strikes, terrorism). These clauses are unique to most contracts and have very specific language identifying the types of events covered, the process for claiming or notifying the other party of the force majeure event, and what to do going forward (excused from performance / suspended performance / additional time and/or money / termination, etc.).

In common law jurisdictions, like the overwhelming majority of the U.S., force majeure is not implied as a matter of law – that is, there’s no common understanding of what a force majeure is such that it could be applied by judges or tribunals to normal contract interpretation.  Force majeure clauses must be express, and they will be interpreted strictly according to their precise language. Even a widely-worded force majeure clause may not necessarily capture events such as COVID-19, and the party relying on the clause will still likely need to prove that the event was not “reasonably contemplated” by the parties when making the contract, and that the event is “beyond reasonable control” of the party seeking relief.

What should my next steps be?

Review – In light on the current pandemic, it is important to review every contract you have that requires some form of fulfillment of goods or services, or some sort of financial action or commitment over the next 90 days.

Be proactive – It is also important to be proactive in seeking information and communications from your business relationships (suppliers, contractors, customers, owners) regarding the impact of the virus and how best to avoid or mitigate potential disruptions.

Seek legal advice – If you or your real estate investment, development, or construction business is at risk, contact a construction attorney with significant experience in contract delay litigation, insurance coverage disputes, bonding issues – performance and payment challenges, and particularly force majeure clauses. An experienced attorney with a solid understanding of how these events are likely to be resolved by the courts can help avoid potential disasters to existing business and long-term relationships.

To learn more about the protocols Shutts & Bowen is implementing to protect its employees and clients from COVID-19 exposure, click here.

 

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