By now, the majority of Americans have been impacted in some way by the spread of COVID-19. Restaurants are closed, employees are working from home, projects are postponed and, local, state, and federal governments are implementing emergency measures to combat the spread.
As the virus spreads, the private and governmental reaction will steadily increase and continue to influence the daily affairs of countless Americans. After the dust settles, thousands of individuals and businesses will be left to sort through the effect the virus and the governmental action has had on existing obligations. One primary question will be whether the effects of COVID-19 excuses performance of a contract that was made impossible to perform. The answer lies in what constitutes a “force majeure” under the contract.
What is Force Majeure?
“Force majeure” is French for “superior strength” and is generally defined as an unforeseeable circumstance or “act of God” which prevents the fulfillment of an obligation. The term has been used for many years and historically embodied the idea that a party is relieved from performing a contractual obligation when such performance was made impossible by causes beyond the party’s control.
Application of Force Majeure
Schedules are critical in the construction industry. Profits, availability of materials/labor, and excess costs can all be dramatically influenced by a contractor’s ability to stay on schedule. Delay damages can become overwhelming and liability for failing to maintain the critical path can become insurmountable.
In the wake of COVID-19, some citizens are ordered to shelter in place, public gatherings are restricted, and new legislation requires employer compliance with an employee’s desire to remain away from work.
The shortage of labor in the construction industry will certainly result in significant delays. Liability associated with those delays will be determined by strength of the parties’ contract. A contractual clause which protects against unforeseen events, such as COVID-19, will be the deciding factor in assessing the cost and liability for the delay.
Construction is not the only industry that will feel the effect of COVID-19. In other fields, payments are due, deliveries must be completed, goals must be accomplished, and deadlines must be made on time. Who will bear the responsibility for falling behind and who will pay the cost? The answer, again, rests on the strength of the contract—particularly the force majeure provision.
A strong force majeure provision will, excuse the non- or untimely performance of the party due to COVID-19; allow employers to shift their focus from liability to staying healthy during this pandemic, and enable an employer to pick up where they left off before the outbreak.
Force Majeure Contract Provisions
Parties have used force majeure provisions to excuse performance in events such as hurricanes, earthquakes, and floods. Despite the historical underpinnings, the term can be broadened to account for a whole host of events beyond a party’s control.
Courts rely almost exclusively on a contract’s definition of the term to contemplate its applicability. Thus, it is critical that any contract include a strong provision which excuses performance in light of a force majeure. A strong force majeure clause will:
- Be broadly defined;
- Excuse performance in the event of an occurrence; and
- Outline the parties’ obligations during the event.
COVID-19 and Force Majeure
In addition to our personal health, the global outbreak of COVID-19 has jeopardized the health of the economy. In this light, COVID-19 has not only effected the ability to perform contractual obligations, it has also influenced the ability to financially recover once dust has settled. While many courts have held that certain events, such as an economic downturn in the market, do not constitute force majeure, unforeseen events (such as COVID-19) which precipitate a market decline can certainly be accounted for in strong contract.
As stated above, whether the current crisis constitutes a force majeure is largely determined by the definition in the clause itself. A force majeure clause which takes into account disease, governmental action, quarantine, and changes in the law will be critical to excuse performance during this crisis and help pick up the pieces in the wake of COVID-19.
If you have any questions regarding COVID-19 and its effect on your contractual obligations, please contact Stephanie O’Rourke in our San Antonio office to discuss. Cokinos | Young also stands ready to assist in drafting and negotiating contractual provisions in the wake of recent events. If you need assistance with incorporating events such as COVID-19 into your future contracts, please contact David Tolin in our Houston office.