Coronavirus – An ‘Act of God’ or not?
Oh my God! was a movie based on a middle-class atheist whose shop was destroyed in an earthquake. The movie revolves around the atheist’s struggle to claim his insurance money and learns that the disaster claim does not cover any damage caused by natural calamities classified under “Act of God”. Running out of options, he decides to sue God but fails to find a lawyer for such a lawsuit.
Similarly, the world today is struggling owing to the outbreak of COVID-19. The human cost of the novel coronavirus outbreak has been widely reported and the tragic consequences continue. But beyond the human toll of the current global health crisis, the coronavirus outbreak is having serious economic repercussions to the global economy and the supply chains on which it depends.
As a result of this outbreak, several companies are examining their contracts to understand the extent of their rights, remedies and obligations with respect to their business associates. Suppliers of goods and services unable to deliver on contractual obligations are looking to see what provisions, if any, may protect them from a default.
What is the Force Majeure clause?
Force majeure clauses are contract provisions that excuse a party’s nonperformance when “Acts of God” or other extraordinary events prevent a party from fulfilling its contractual obligations.
Would the outbreak of corona virus amount to an Act of God?
Many force majeure definitions include reference to Acts of God or similar wording. Avoiding philosophical arguments that everything is potentially an Act of God, from a purely legal perspective, there is no one-size-fits-all answer as to whether a particular event falls within this sort of language.
Generally, Act of God appears to denote events due to natural causes without any human intervention. It has also been labelled as “an irresistible act of nature” and some are advising that the phrase (or other catch-all provision) may suffice to cover an outbreak such as coronavirus.
Ultimately, and most importantly, the issue depends on an assessment of all of:
- the nature and context of your particular contract;
- the words in the relevant force majeure clause; and
- the general terms of the contract, including the substantive law / governing law clause.
To assess a business’ rights, obligations, and remedies, whether the business is the party unable to perform or such counterparty, the following should be considered:
- What contract provisions are relevant? Determine whether the contract includes a force majeure provision, and whether there any other relevant provisions to assess. Contractual provisions to review include any breach, termination, cancellation, or repudiation terms that may be applicable under the circumstances.
- How does the contract define a force majeure event? Is the provision broadly written? Assess whether the outbreak of the coronavirus, or the efforts to contain it, constitute a force majeure event under the contract. Examples of relevant language that may be included are “disease,” “epidemic,” “pandemic,” “quarantine,” or “acts of government.” Depending on the parties’ prior negotiation and drafting, a contract may either explicitly list all qualifying events, or generally define a force majeure event as an event beyond the parties’ control, leaving more room for interpretation. Broad, catch-all language may be interpreted differently depending on the applicable law.
- Is the coronavirus outbreak the cause of the party’s nonperformance? Consider whether the party could have timely performed if the outbreak did not occur. If other factors contributed to the party’s nonperformance, a force majeure clause may not be applicable. For example, to the extent a company takes proactive steps to avoid further spread of the coronavirus, e.g., by advising workers to stay home, does the resulting inability to perform constitute a force majeure event?
- Review the wording of force majeure clauses, paying particular attention to the list of non-exhaustive events which is often included, and the consequences of triggering a force majeure.
- If a long list of force majeure events is included, it is likely to be helpful (where you are seeking to rely on the clause) if pertinent wording is included such as “pandemic”, “epidemic”, “outbreak”, “crisis” or “governmental action”.
- Watch out for wording in new contracts that require that the event of force majeure is “unforeseeable”.
- Contact counterparties of contracts which may be affected and discuss a possible renegotiation, or postponement of obligations, as appropriate.
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