Adding a Coronavirus Force Majeure Provision to Your Contract
Bans on large gatherings due to coronavirus (“COVID-19”) can be devastating for performing musicians who depend upon large ticket sales for their income. Not to be deterred by COVID-19, musical groups ranging from the Berlin Philharmonic to the Metropolitan Opera in New York, to Quartet Dafne in Venice, haven’t canceled their performances. Instead, they have taken them online.
Performing in empty auditoriums to huge audiences via live-streaming or YouTube, these musicians have replaced thunderous applause for clapping emojis. Those wishing to join one of these international audiences need only go to Classical FM for a list.
These musicians adapted to restrictions necessitated to combat COVID-19. But contracting parties may find it more challenging to adjust.
Parties under existing contracts may resort to force majeure clauses to delay or excuse performance. But what about parties signing new contracts at this uncertain time?
Those parties can plan for the status quo, although unique. But these are extraordinary times. So, parties may want protection if additional government restrictions, new supply chain interruptions, or another fallout from COVID-19 makes it difficult or impossible to perform under the contracts. Those parties call upon their attorneys to prepare COVID-19 specific force majeure clauses.
But like the contracting parties, their attorneys are in uncharted territory. There are no forms for a pandemic-specific force majeure clause. And even those who have been in the profession for decades haven’t dealt with a fast-moving, worldwide pandemic. We are like pilots flying without instruments in cloudy weather.
This article is part of a series discussing COVID-19 and real estate law. Previous articles are available in my Bach to Business blog. This article discusses how to prepare a COVID-19 specific force majeure clause. Readers interested in whether COVID-19 triggers existing force majeure clauses, should read my previous article Coronavirus and Contract Force Majeure Provisions.
Anatomy of a Force Majeure Clause
Force majeure provisions excuse a party from performing under a contract if certain “force majeure” events happen. 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.
Force majeure clauses usually contain three parts, which I call the force majeure events or triggers, impact level, and the remedies.
Force Majeure Events or Triggers
The first part of a force majeure clause is the list of force majeure events, which I like to call triggers.
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 events that might be force majeure triggers. Those items can include Acts of God, terrorist attack, governmental order, strikes, and lack of supplies. Sometimes, there also is a general “catch-all” trigger that covers unforeseen events that make contract performance impossible. Before now, pandemic was infrequently included as a force majeure trigger.
Impact Level
The impact level is the gateway from the force majeure event to a remedy. Even if a force majeure trigger occurs, if the impact on the parties is minimal, there will be no remedy. The required level of impact before a party can pursue a remedy varies from contract to contract.
The most stringent force majeure clauses require that the force majeure event make it “impossible” (the impact level) for the party to perform under the contract before the party has a remedy under the force majeure clause. Other force majeure clauses may set the impact level at “impracticable,” “material disruption,” or “commercially unfeasible.”
Remedies
If a force majeure event occurs and it impacts a party at the required level, then the remedies section of the force majeure clause will describe what comes next. Like other parts of a force majeure clause, the remedies section also will vary depending upon the contract.
For example, in a construction contract, the remedy commonly is a delay in performance. In other contracts, such as a contract for supplies where timing is essential, the remedy might be termination of the contract so the purchaser can obtain the supplies from another source.
A force majeure clause may have different remedies depending upon the trigger. For example, a flood that destroys real estate might necessitate the termination of a real estate purchase contract. But a supply shortage that delays construction that must be completed before a real estate acquisition is more likely to cause a closing delay.
Sometimes, remedy clauses include an ending to the delay due to force majeure. For instance, a construction contract may allow up to a 30-day suspension of performance due to a force majeure.
One thing to consider when preparing the remedies section with a time limitation is what happens once the time period ends. Does the contract terminate? Is it considered a contract breach by one party? Does one party or another have to pay a delay penalty? Or do the parties move to a different phase, such as renegotiation of impacted provisions?
Preparing a Force Majeure Clause
These considerations will affect force majeure contract provisions generally.
What critical outside goods, services, or circumstances the parties depend upon to perform their obligations under the contract
For a construction contract, the parties might depend upon obtaining supplies and labor, utility access, permits, and good weather. For a national convention contract, the parties would rely upon transportation and a venue able to host the event. And for a real estate purchase contract, property maintenance, a functioning economy, and access to government recording offices are necessary.
The events that could prevent the client from performing under the contract
Using the previous examples, for the construction contract, disruption in the supply chain, strike, utility failure, permit delays, and adverse weather would prevent performance. For the convention contract, disruption in transportation or damage to the venue would prevent performance. For the real estate purchase contract, adverse weather or fire that damaged the property, shutdown of the economy such that financing isn’t available, or closure of the government recording office could prevent performance.
What remedies would minimize those consequences
Usually, the remedy for a force majeure event is excused performance. The question the parties must consider is how long performance will be excused.
In our construction contract example, a common remedy would be delay if the force majeure event prevents performance. Sometimes, there will be a cap on the length of the delay if, for example, the owner has completion deadlines it must meet under construction loan documents.
With the convention, disruption in transportation, or damage to the venue substantial enough to impact the convention probably isn’t amenable to delayed performance. It’s difficult to delay a convention by a few weeks or months. So, contract termination makes more sense.
For a real estate contract, significant destruction of the property might justify termination. But minor damage might instead be remedied by a reduction in the purchase price by the cost of repairs. Financing delays or government closures usually can be resolved by delay until the force majeure ends.
COVID-19 Force Majeure Clauses
COVID-19 and the government orders relating to it would impact all of the contracts in the above examples. Construction cannot continue if the workforce is sick or under quarantine or the permits are delayed due to telecommuting employees, extensive employee absences, or shutdown of the office, and online processing isn’t available.
A convention cannot go forward with governmental limits on the number of people who can congregate. A real estate purchase agreement cannot close if lender telecommuting or economic destabilization delays mortgage loan processing or if recording offices are closed.
Most force majeure events frequently affect only some businesses, industries, or geographic areas or they may cause only a short-term impact on contract performance. However, we can expect COVID-19 to impact all industries in every geographic area. And the impact is likely to be lengthy.
It’s not a surprise that parties entering into contracts during this historic pandemic would want a COVID-19-specific force majeure clause. But force majeure triggers usually are events that the parties don’t anticipate. That makes a COVID-19 force majeure clause, which covers a force majeure event that is already occurring, different from the typical force majeure clause.
Writing a COVID-19 Force Majeure Clause
When negotiating COVID-19 specific force majeure clauses, they should consider the following in addition to the usual force majeure clause preparation process:
The force majeure clause should not change the allocation of risks elsewhere in the contract.
For example, in a real estate purchase contract, the buyer always assumes the risk of reduction in property value due to changes in market conditions. So, the buyer shouldn’t be entitled to an adjustment in property value due to generally applicable economic changes.
The situation might be different for economic changes specific to the property. For instance, suppose the property is a senior housing property that doesn’t follow regulatory guidelines and has an unusual number of COVID-19 cases and loses its license That might be a property force majeure trigger.
The parties should incorporate the status quo into the contract when written.
Therefore, only events after contract execution should be force majeure triggers. In the senior housing example, if when the contract was signed, the state had already issued corrective notices, the impact of those notices shouldn’t be force majeure triggers as such. Instead, it could be a condition to closing that the corrective notices be resolved.
Foreseeable developments should not be force majeure triggers.
Since the governors of California, Connecticut, Illinois, New York, Louisiana, New Jersey, Ohio, and Puerto Rico have issued mandatory seclusion orders, a governmental seclusion order shouldn’t be a force majeure trigger. But government shutdown, suspension of agency mortgage programs, or closure of offices needed to record documents or of the financial markets aren’t foreseeable right now.
Looking Beyond COVID-19
Concert halls and musicians didn’t expect their seasons to be cut short due to COVID-19. Nor did contracting parties expect a worldwide pandemic of this magnitude. The H1N1 pandemic in 2009 didn’t have this impact. And the AIDs epidemic moved relatively slowly due to the difficulty in transmitting the virus.
Many contracts, including most real estate purchase contracts, were written without force majeure clauses. Many hotel event contracts’ force majeure clauses didn’t cover pandemics or even epidemics.
Parties likely will be insisting that epidemics and pandemics be included as force majeure events in their contracts. But that won’t solve the real problem: that parties frequently agreed to boilerplate force majeure clauses.
The real solution is not blanket inclusion of pandemic in a laundry list of boilerplate force majeure triggers, because the next unexpected event might be something else. Instead, parties should try to imagine how unexpected events might affect their specific contracts and tailor force majeure contracts that meet their unique needs.
© 2020 by Elizabeth A. Whitman
Any references clients and their legal situations have been modified to protect client confidentiality
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