Coronavirus and Contract Force Majeure Provisions

Summer music festivals, “picnic at the pops,” live fireworks accompaniment, and other open-air performances keep musicians employed in warmer weather. This year, President Trump has declared a national emergency and limited international travel, and state governors, including Governor Hogan in my home state of Maryland, have limited public gatherings.  Consequently, festivals and concerts are being cancelled due to novel coronavirus (“COVID-19”). It’s questionable whether summer festivals will go forward. But even when we aren’t facing a pandemic, it takes special preparation for a musician to play outdoors.  

Weather is a common concern with outdoor performances. In windy weather, music can blow away. Musicians may carry clothespins or special clips to secure music to the stand. Plus, humidity and rain affect many instruments, particularly those made from wood.  

In humid weather, clarinet pads are prone to sticking and holding keys down when the musician doesn’t intend it. Musicians may keep rolling papers in their cases, not so they can light up during the performance but because the thin paper is effective in absorbing excess moisture from pads 

Many string musicians address unfavorable weather conditions by having an “outside instrument,” which might be newer and less vulnerable than their primary instrument. String musicians use synthetic core strings, so their instruments are less sensitive to weather changes than traditional gut string. Because wood responds to humidity, in humid conditions, violin, viola, or cello pegs may stick, and in dry conditions, they may slip. String players may apply peg compound, which helps pegs move smoothly.  

Although musicians can plan for some outdoor performance hazards with special supplies, sometimes a musician has to be creative and quick-thinking to perform outdoors. Jazz flutist, Jean-Paul Rampal once was plagued with bees flying near him when he was performing. His solution: Play “Flight of the Bumblebee.”  

Like musicians, businesses and real estate owners frequently plan ahead by negotiating contract language to protect against unexpected developments. However, since no one planned for the COVID-19 pandemic, parties may comb through contract language to determine if generic language fits the extraordinary situation.  

This article is part of a series discussing COVID-19 and real estate law. A previous article, Coronavirus—Best Practices for Commercial Real Estate Owners, discusses owner liability for COVID-19 claims. This article examines whether COVID-19 might trigger “force majeure” contract provisions.  

What is a Force Majeure Clause? 

Force majeure provisions excuse a party from performing under a contract if certain “force majeure” events happen. Usually, force majeure clauses delay the contract, so the contract will move forward when the force majeure event ends.  

Force majeure clauses are standard in some real estate industry contracts, such as construction contracts and leases. The clauses aren’t as common in real estate purchase contracts, which usually move from contract to closing in a matter of a few months. Generally, the longer the contract and more susceptible it is to interference due to outside events out of the parties’ control, the more likely the contract will have a force majeure provision.  

In law, force majeure, which means “superior force,” refers to significant events outside of the control of the contracting parties. Force majeure items vary from contract to contract. In An Orchestra, the DC Beltway, and Acts of God: Why Your Contract Needs a Force Majeure Clauses, I provided a lengthy list of the things that might be force majeure.  

Sometimes, force majeure events are called “Acts of God,” because many, like windy or humid weather at an outdoor concert, are outside of human control. Force majeure sometimes includes an epidemic, pandemic, or other significant disease situation. Force majeure also might include disruptions to the supply chain or labor shortages, whether due to an “Act of God,” such as weather, or a trade embargo, supply or labor shortage, or in this case, pandemic. 

When is COVID-19 Force Majeure? 

Even if a contract has a force majeure provision (not all do), COVID-19 won’t necessarily be covered. That’s because usually, contracting parties negotiate what circumstances will be covered by the contract’s force majeure clause. 

Things like extreme weather, natural phenomenon, terrorism, war, and terrorist attacks are in most force majeure provisions. However, other force majeure circumstances listed usually are customized to the parties’ anticipated needs. And not every force majeure provision includes pandemics. 

Sometimes, looking at the listed force majeure items won’t be the final answer on whether COVID-19 is covered. Many force majeure clauses include vague, catch-all language, which might cover COVID-19, such as: 

“Force majeure shall also include unforeseeable circumstances beyond the control of the parties.” 

Even then, the evaluation isn’t as easy as it may appear. That clause likely would excuse performance under a contract signed in 2019. However, COVID-19 might not have been “unforeseeable” for a contract signed in March 2020.  

Also, some contracts include “Acts of God” as force majeure without defining the term. COVID-19 might be force majeure under those contracts. But if the contract contains a definition of “Acts of God” without mentioning disease, pandemic, or epidemic, then COVID-19 might not be an “Act of God” under that contract. 

How A COVID-19 Might Impact Business or Real Estate 

Some effects of COVID-19, for instance, lack of employee availability due to quarantine or inability to travel due to travel restrictions, may be obvious. Others are indirect or less apparent.  

For example, sadly, it is likely that COVID-19 will reduce occupancy in senior housing as residents become ill and move to hospital care. Seniors are not likely to move into a senior housing community where there is a perceived risk of COVID-19. Therefore, the community’s revenue is likely to be lower for a significant period. A drop in revenue may affect the debt service coverage ratio (“DSCR”), a benchmark which many lenders require real estate borrowers to maintain until they pay off their mortgages. If the reduced revenue resulting from COVID-19 causes DSCR to fall below the required level, that may fall under a force majeure clause.  

Even if COVID-19, itself, isn’t force majeure, the virus could create circumstances which are force majeure. We already have supply chain disruption due to COVID-19 in China, which is affecting supply availability. And worker illness or quarantine may reduce the available labor force. 

Unavailability of supplies and lack of labor frequently are force majeure events in real estate development or construction contracts. And, lack of supplies or worker shortages may mean that property owners can’t maintain the property or its operations at the usual level.  

What Happens if There is a Force Majeure? 

Force majeure clauses enable a party to prevent a contract breach if they cannot perform their obligations due to a force majeure event. How force majeure impacts contract performance obligations usually depend upon the contract. Typically, a force majeure event suspends the parties’ obligation to perform under the contract until the force majeure event is resolved.  

Although force majeure provisions sometimes will completely excuse contract performance, sometimes, only obligations affected by the force majeure event are suspended. Plus, COVID-19 may cause multiple force majeure events under a single contract, complicating the analysis. For instance, a party to a development contract might face disruption in the supply chain or worker unavailability due to quarantine. Slowdown of permit processing due to government office closure or telecommuting also might further impede the party’s performance under the contract. These would trigger force majeure events for lack of available supplies, disruption in the workforce, and regulatory disruptions, with all being attributable to COVID-19. 

Force majeure might not be adequate to excuse a disruption with COVID-19’s broad impact if the contract caps the number of days for the suspension for force majeure. If the suspension period isn’t long enough to allow recovery from the disruption, parties still may face a default under the contract.  

What if COVID-19 Doesn’t Trigger Force Majeure? 

If contract force majeure provision doesn’t provide adequate safeguards or if a contract doesn’t have a force majeure provision, not all hope is lost. There are legal concepts that sometimes might excuse a party’s performance. But they will vary from state to state. 

At common law, the doctrine of impossibility might excuse contract performance when an unforeseeable event makes performance impossible (or impracticable). For contracts signed before February 2020, COVID-19 should meet the unforseeability requirement. Showing unforseeability will be more challenging for contracts signed after the US knew the virus's reach. 

If these options aren’t available (and even if they are), parties should communicate their needs to each other and try to address each other’s concerns. We are facing circumstances unprecedented in most of most people’s lifetimes. In unusual times, even parties with acrimonious relationships should set aside their differences and work together to find the best solution for all.  

© 2020 by Elizabeth A. Whitman 

Any references clients and their legal situations have been modified to protect client confidentiality 

DISCLAIMER: The content of this blog is for informational purposes only and does not provide legal advice to any person. No one should take any action regarding the information in this blog without first seeking the advice of an attorney. Neither reading this blog nor communication with Whitman Legal Solutions, LLC or Elizabeth A. Whitman creates an attorney-client relationship. No attorney-client relationship will exist with Whitman Legal Solutions, LLC or any attorney affiliated with it unless a written contract is signed by all parties and any conditions in such contract are satisfied.