February 8, 2022

Contracts, Force Majeure, and COVID-19: Where Do Things Stand Now?

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In March 2020, as the pandemic took hold, we predicted an often-overlooked contract clause would become a hotly contested issue—and we were right. As coronavirus prompted government stay-at-home orders and establishments to close for safety concerns, businesses looked to their contracts for protection. They started with a commercial contract clause called “force majeure.” However, most contracts did not specifically cite “virus, epidemic, or pandemic” as applicable. That left businesses interpreting the clause’s broader language for relief against contract requirements as the world shut down. So, where do things stand years later with contracts, force majeure, and COVID-19? Case law has not kept up with the pandemic and many of the force majeure challenges are still working their way through the courts. However, with a new strain of the virus surging, now is a good time to reference the cases available for guidance should 2022 start to look a bit too much like 2020. 

What is force majeure? 

Force majeure translates to “superior force.” The clause excuses a party’s contractual performance obligations when circumstances beyond control make work impractical, inadvisable, impossible, or illegal. Contract language varies, but clauses typically either use broad language such as “unforeseeable events arising through no fault and beyond reasonable control” or provide a more specific list of qualifying events. Commonly included incidents are war and terrorist attacks, strikes, fire, and natural disasters. 

Force majeure events often are synonymous with or include the legal term “acts of God” because they are seen as outside human control. However, governmental action preventing or prohibiting work also may apply. 

Does COVID-19 qualify for force majeure? 

This issue is under debate in courts across the country. However, COVID-19 typically must meet three criteria to achieve force majeure eligibility: 

  1. COVID-19 must fall within the contract’s defined qualifying events, 
  2. The virus and resulting pandemic must be the direct or “proximate” cause of the company’s inability to fulfill its contractual obligations, and
  3. COVID-19 represents a legal or physical restraint rather than just a financial obligation for performing work. 

Note that while some contracts may include general language defining applicable events, courts often apply a narrow definition to specifically listed items. Should a force majeure contract claim require litigation, judges will examine if the event was reasonably foreseeable and planned for appropriately. Courts also consider if non-performance was unavoidable or could have been conducted in an alternative way without a contract breach.

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Early Verdicts on COVID-19 and Force Majeure

Courts use previous verdicts to establish precedent. Lawyers reference precedent as a strategy for showing judges that their case is the same or different. The cases filed regarding COVID-19 and force majeure in contracts may take years to work their way through the system. But some early verdicts provide guidance into the thought process of the courts so far. 

JN Contemporary Art LLC v. Phillips Auctioneers LLC, 2020

Phillips Auctioneers was under contract to sell a painting for JN Contemporary Art with a $5 million guarantee sale price. The auctioneer canceled the event in compliance with New York Governor Cuomo’s executive orders prohibiting non-essential businesses to operate during to the pandemic. The court cited the force majeure provision in dismissing the art dealer’s case when it sued the auctioneer to enforce the contract. 

The contract’s force majeure provision stated:

In the event that the auction is postponed for circumstances beyond our or your reasonable control, including, without limitation, as a result of natural disaster, fire, flood, general strike, war, armed conflict, terrorist attack or nuclear or chemical contamination, we may terminate this Agreement with immediate effect […].

Using our three criteria above, the contract does not specifically reference pandemic, epidemic, or public health crisis. So, a look at the broader language offers “as a result of circumstances beyond control without limitation […]” Therefore, the court applied that phrase along with the words “natural disaster” to include the circumstances of the pandemic. With that interpretation, COVID-19 fulfills the obligations of the second and third criteria as well. 

Gibson v. Lynn University, 2020

This case primarily tests criteria number three. A student sued his university for a tuition refund claiming that the institution breached its contract to provide in-person learning during the pandemic. The university instead offered remote learning to its student population at that time. The force majeure clause stated, “[t]here will be no refund of tuition […] in the event the operation of the University is suspended at any time as a result of [a force majeure event].”

The courts denied Lynn University’s motion to dismiss stating the contract’s force majeure clause did not apply. Because the university did not suspend its operations but rather offered an alternative mode of teaching, it breached the contract. 

CEC Entertainment, Inc., et al., 2020

CEC Entertainment operates a series of Chuck E. Cheese restaurants and arcades across the country. The pandemic and related governmental regulations forced CEC to limit operations in venues across the county. The enduring financial hardship prompted CEC and its affiliates to file petitions for Chapter 11 bankruptcy relief in June 2020. In its petition, CEC applied the contract’s force majeure clause as reason to reduce or alleviate the company’s obligation to pay rent on time. The court disagreed, finding that because the value of the venues had not been destroyed, the company’s rent obligations stood despite its inability to operate. This case could serve as an indicator of how courts will view future bankruptcy filings related to the pandemic’s disruption of operations. 

Hitz Restaurant Group, 2020

Another bankruptcy court in Illinois took a different approach. Hitz Restaurant Group stated that the force majeure clause in its contract excused its financial obligations during the time of the governor’s executive order prohibiting on-site food and beverage consumption at Illinois restaurants. However, the court cited Illinois law which limits force majeure clauses to triggering events that “proximately cause” nonperformance. The governor’s orders still allowed the restaurant to operate, just without in-door consumption. The court held Hitz responsible for 25% of its rental payments, the equivalent of the usable portion of the restaurant, which was the kitchen. 

NetOne, Inc. v. Panache Destination Management, Inc. 2020

The NetOne case looks at what happens when a contractual promise is made and one party already has substantially performed. NetOne booked a party at a Panache resort and put down a large deposit to reserve the space. Because the event had yet to take place, the resort’s work and expenditures were minimal. When the pandemic forced the event’s cancellation, the contract made things easy: coronavirus represented a force majeure event relieving both parties of future performance. However, NetOne sued to recover its deposit and lost. The courts found that force majeure, as stated in the contract, did not require the non-terminating party to return the deposit. This case could have important implications for property owners, managers, and contractors accepting or placing deposits for venues and/or materials. 

What information is needed when invoking a force majeure clause? 

When a contract allows for COVID-19 as a triggering event for non-performance, gather additional information before using force majeure. Failure to comply with contract requirements may nullify the clause. Also, citing force majeure may create a negative impact on the overall project more detrimental than the event itself, such as termination. Understand the contract and proceed with caution. 

How quickly must the contract’s counterparty be notified? 

Project timelines make or break a construction project. The contract may stipulate a timeframe for invoking a force majeure clause. For example, an agreement may require a contractor invoke the force majeure clause within 30 days of the start of a governmental order preventing work as scheduled. Failure to provide a timely notice can void the clause and cancel a contractor’s ability to seek relief for delayed work. 

How long can a project delay last without a contract cancellation? 

Some contracts allow counterparties to cancel the agreement if a delay extends beyond a certain number of days. Weigh the risk of a contract cancellation against the anticipated delay COVID-19 may cause before resorting to force majeure. Collaborate with the counterparty on a mutually beneficial solution first before leveraging the clause. Let’s say an executive order limits the number of people working inside a space. That may extend construction deadlines due to using a smaller workforce. The length of those delays due to uncontrollable circumstances might warrant a look at the contract. 

Is there an alternative means of performance? 

Investigate if the contract allows for a Plan B to complete the work. If COVID-19 causes parts and materials shortages or delayed deliveries, seek alternative product sourcing. The value of keeping the project close to its original schedule may outweigh the costs or compromises of using alternative materials. Business contingency plans also may include revised schedules or alternative timelines for completing the work. 

What are the contractor’s obligations after a triggering event? 

Seek guidance on how the contract applies to the project following a force majeure event. Understand if the contract is cancelled or delayed. Discuss when construction will resume and consider the implications for your company’s other project deadlines. Understand revised timelines and how they could impact project budgets. 

Moving forward with force majeure?

COVID-19 affected most construction projects across the US with workforce shortages, overdue material deliveries, or delayed project schedules—and history may repeat itself. While the virus continues creating new challenges, use the project’s contract to take charge. Know the contractual rights and remedies afforded for the things you cannot control and plan for the things you can. 

For help along the way, look to myCOI. Our insurance tracking technology helps manage risk so you can get back to business. 

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