Is COVID-19 a Force Majeure Event?
March 25, 2021
By Barry Schaps
The entire transportation fuels supply chain, from crude oil wellhead to the retail service station dispenser, is full of commercial contracts requiring parties to perform specified acts in specified ways within specified timeframes. The impacts of COVID-19 have disrupted normal business activities and upended commercial transactions which may result in years of litigation. You may be familiar with the concept of “force majeure,” but are you also well versed in the legal constructs found within commercial contracts? Just in case you’re not, today we attempt to offer applicable insight by answering the following questions:
- What is a Force Majeure Clause?
- What is a Force Majeure Event?
- Is the Coronavirus Pandemic a Force Majeure Event?
What is a Force Majeure Clause?
Simply put, a force majeure clause is a contractual provision that excuses a party’s nonperformance when “acts of God” or other extraordinary events prevent a party from fulfilling their contractual obligation. More specifically, a force majeure clause is defined as a “contractual provision allocating risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.” Many parties are now finding that cutting and pasting clauses from previous contracts may not be the best practice as most contracts simply list specific events that the parties agree constitute force majeure (often not including a pandemic in the list), but do not fully apply to the specific contract under negotiation.
What is a Force Majeure Event?
For a contractual party to utilize a force majeure clause, the event must meet three important criteria:
- Does the event fit the specific description of such an event in the contract?
- Is the event consistent with the concept of an unknown event outside the parties’ reasonable control that disrupts their ability to perform the contract?
- Does the event make it impracticable or impossible to perform the contract?
In a legal proceeding, even if the court determines that the parties intended an event to be a force majeure event, the event must still be unforeseen and outside the parties’ reasonable control such that it disrupts their ability to perform the contract. At this point, things get even more complex as it must be determined if the event was beyond a party’s ability to perform. Following are three conditions that must be satisfied in assessing if an event is beyond a party’s reasonable control:
- It could not reasonably have been foreseen at the time they entered into the contract.
- It was not caused by the fault or negligence of the nonperforming party, and
- It could not have been avoided by diligence, prudence, or care.
The force majeure event also must have caused the disruption of the parties’ ability to perform their contract. Even the most unforeseen, unexpected, and catastrophic event the world has ever seen will not excuse performance of a contract that is not significantly impracticable or impossible to perform due to that catastrophic and unforeseen event. For example, if the party incurs more expenses or realizes less profit as the result of an event, it does not rise to the level of impossibility of performance and therefore would not be a force majeure event.
Is the Coronavirus Pandemic a Force Majeure Event?
Some boilerplate force majeure clauses specifically list health disasters such as disease, pestilence, or pandemics as force majeure events, but many do not. If, however, your contract does not specifically list pandemic, all is not lost if the contract contains a general “catch-all” force majeure provision adding other unforeseeable events beyond the parties’ reasonable control. If a pandemic is not specifically listed as a force majeure event in your contract, ultimately the courts will determine if the financial chaos caused by the pandemic was unforeseeable at the time the parties entered into their contract and whether it caused sufficient disruption of the parties’ ability to perform their contract.
Another possible route is for a party to claim that the COVID-19 pandemic was a “natural disaster.” Black’s Law Dictionary defines “natural” to mean “brought about by nature as opposed to artificial means” and “disaster” as “a calamity; a catastrophic emergency.” In a recently decided case in the Southern District of New York, the court stated that “by any measure, the COVID-19 pandemic fits those definitions.” The SDNY decision opens a path for parties to make force majeure claims or defenses, when the contract clause identifies “natural disasters” as a force majeure event, even if the clause omits references to pandemics or diseases.
If you are a party to a contract which is keeping you up at night, call your legal counsel immediately to best protect your possible claim or to mitigate damages. After that, contact Stillwater. We have worked with clients on both sides of force majeure clauses and have successfully provided expert reports and testimony in this regard. Finally, for our readers, their friends and family impacted by the pandemic, Stillwater extends to all, our thoughts and prayers.