If you are like most people, you are trying to anticipate the short-term and long-term effects of the COVID-19 pandemic. Given the recent spate of suspended meetings, conferences and other events, such as Austin canceling its South by Southwest festival, many are questioning the legal liability of the individuals and organizations involved.
This issue has led a likely record number of people to read, for the first time, the force majeure clauses embedded in the standard boilerplate provisions of their contracts, ticket policies and sales agreements. Such declarations, if prepared correctly, excuse nonperformance stemming from an unanticipated or uncontrollable event such as war or natural disaster.
Understanding a force majeure clause is a tricky business, but fortunately, in Texas the courts typically enforce them based on the defined occurrences that are covered.
So, where does the new coronavirus fit?
The first step is to figure out if the force majeure clause contains language matching the current conditions. Look for words or phrases such as outbreak, pandemic, epidemic, pathogen, quarantine, action by any governmental authority, national or regional emergency, labor stoppages, labor slowdowns or other industrial disturbances.
If you have a contract that you are giving additional scrutiny due to market conditions, and the contract has a force majeure clause that does not contain a word or phrase sufficiently specific to include COVID-19, the next logical question is whether a court is likely to broadly interpret that clause to include pathogens.
If the force majeure clause does not contain any of these words or phrases, one argument to consider is whether the spread of COVID-19 fits in the “act of God” catchall contained in most force majeure clauses.
Is this new virus an act of God? Unsurprisingly, courts have not yet grappled with this question. However, the guidance we do have says that it depends on the specific language of the contract. That is helpful, but it is important to note that courts are not in the business of interpreting contract provisions contrary to the parties’ intent at the time they entered into the contract.
In the absence of such an interpretation, courts might excuse nonperformance if the nonperformance was caused by an unforeseeable event (and unforeseeable events are addressed in the force majeure clause). What is “unforeseeable” is determined at the time the parties entered into the contract.
Accordingly, though it might be tempting to argue that this new virus is an unforeseeable event excusing performance under the contract, this may be wishful thinking. In recent years, the uptick in epidemic or pandemic pathogens has been extreme. The news extensively covered several epidemics (West Nile virus, SARS and Ebola) and pandemics (various varieties of flu pandemics and HIV and AIDS) long before COVID-19 hit.
If you are a sophisticated business or larger player in any industry, the courts may use that sophistication against you. That is, a court may very well take the position that pathogens – similar to tornadoes and hurricanes – are sufficiently publicized and well known such that if a party to a contract wanted to protect against pathogen outbreaks, epidemics or pandemics, they could have specifically contracted to do so by including such language in their force majeure clause.
Not only are courts reluctant to broadly construe force majeure clauses, there are major policy reasons to prevent such construction. As of March 3, China issued 4,811 force majeure certificates. These certificates work between Chinese parties but are not likely to hold international water. In other words, Chinese contractors with a force majeure certificate may feel empowered to break contracts due to the coronavirus pandemic.
But as a practical matter and irrespective of the validity of these force majeure certificates, a Chinese company holding such a certificate could refuse to perform under a contract with another Chinese company. While this may sound remote and attenuated to American or even global markets, it can have a dramatic impact on Chinese and U.S. companies further down the supply chain.
For example, if a Chinese exporter cannot get raw materials from its Chinese suppliers due to a force majeure clause, that Chinese exporter cannot perform under a contract with a U.S. importer. The net effect is supply chain deadlock. Such actions could severely affect U.S. imports and could significantly impact nearly every supply chain in America, not to mention the global supply chain. The total value of these force majeure certificates is $53.79 billion, and their net economic effect is likely much more.
This policy reason alone may be a sufficient enough basis for U.S. courts, to the extent the issue comes before them, to decline to uphold Chinese-issued force majeure certificates, leaving Chinese exporters holding the bag and U.S. importers without any recourse but to initiate litigation for the scraps left over (while some very large companies purchase insurance coverage for communicable diseases, most policies contain exclusions for business interruptions caused by viral or bacterial outbreaks).
Going forward, be sure to read the force majeure clause in any contract and consider such clauses if the contracts do not contain them. Within the force majeure clause, ask counsel to include a provision covering pathogens or outbreaks, epidemics or pandemics. As we have seen in Texas, if the force majeure clause expressly provides for such an occurrence, it is likely to be enforced.
From there, ensure that the terms within the force majeure clause are well-defined and correctly allocate risk between the parties. Consider conditions such as notice provisions pertaining to the force majeure event and the expected time period of the delay, specific force majeure declarations, mitigation of damages clauses, and required updates to be provided by the party declaring force majeure. The inclusion of specifically tailored force majeure clauses should become standard practice in any business dealings, as global disease events are likely to increase in frequency and severity in the future.
Josh Sandler is a partner at the law firm of Lynn Pinker Cox & Hurst, LLP. He would like to thank Jet A. McGuire, a student at the Southern Methodist University Dedman School of Law, for his assistance in assembling this article.