Do Force Majeure Clauses Include the Coronavirus?

The COVID-19 pandemic generated sweeping changes for all California businesses. The state-wide stay-at-home order has forced many businesses to stop operating altogether, while others are only able to partially operate. In addition, cities, school districts, nonprofits and other agencies that have contracts with these impacted business must now navigate their options.

As each entity considers how to handle these events, there are two related questions on contracts and insurance. The first involves “force majeure” clauses, and the second involves the availability of insurance coverage.

Is There a Force Majeure Clause, and is it Applicable?
A “force majeure clause” in a contract defines the scope of unforeseeable events that might excuse nonperformance by a party. Typically, they refer to “Acts of God” or similar events as being the basis for delaying or excusing performance. A business may want to invoke a “force majeure” clause to avoid having to perform under a contract, or it may be confronted with a contract party who does not want to perform and points to the “force majeure” clause in the contract.

However, merely including a force majeure clause in a contract does not automatically relieve a party of performance. Is the COVID-19 pandemic sufficient to suspend performance in a contract? The answer, of course, is: “it depends.” Whether a force majeure event has occurred, and the repercussions of that event, depend on the specifics of the contractual language.

Some force majeure provisions specifically include reference to epidemics or pandemics. However, many standard force majeure clauses simply include the standard reference to “act of God” – with no further definition.

The term “act of God,” in its legal significance, generally means any unpreventable disaster that is the result of natural causes, such as earthquakes, violent storms, lightning and unprecedented floods. It is such a disaster, arising from such causes, and which could not have been reasonably anticipated, guarded against or resisted. It must be due directly and exclusively to such a natural cause, without human intervention. It must proceed from the violence of nature or the force of the elements alone, and with which the agency of man had nothing to do.

Importantly, according to well-established California case law, force majeure is not necessarily limited to the equivalent of an act of God. Instead, under the 1992 California Appellate Court decision in Horsemen’s Benevolent & Protective Association v. Valley Racing Association, the test is “whether under the particular circumstances there was such an insuperable interference occurring without the parties intervention as could not have been prevented by prudence, diligence and care.”

California’s interpretation underscores that, while an epidemic or pandemic may logically seem to be an “act of God,” the agreement language and context will govern. It is important to first determine how a force majeure clause is described in an agreement and what remedies are available. It is also essential to pay close attention to any notice and timing requirements. If “act of God” is not specifically defined in an agreement, courts are likely to interpret this language as is common between the parties and the industry and as is consistent with applicable law.

A Good Time to Revisit Agreement Language and Insurance Coverage
This may also be a good time to review insurance policies to confirm what coverage may be in place to compensate for loss of revenue or claims by the other contracting party for damages based on a contract cancellation. It may also be beneficial to ask what other coverages may be available to insure against such losses and at what cost.

The issues here quickly become quite complex. For example, most “business interruption” policies require that the “interruption” be related to some “physical damage” (such as a place of business burning down). While that means that most COVID-19 claims may not be covered, there is case law suggesting that “physical damage” does not equate to “destruction,” and if a place of business had someone working there who actually had the virus, and could have contaminated the business property with it, that may be a type of “damage” that could be covered by business interruption insurance.

Unfortunately, many policies expressly exclude from coverage damage caused by “bacteria or virus,” and those exclusions may be barriers that cannot be overcome. There are also policy provisions that address loss of business income due to the acts of civil authorities (such as where a business is not physically damaged but must close because of damage to another property nearby). These could theoretically apply if a nearby business had to close due to COVID-19 infected people being present, and the government orders a business to close also due to its proximity.

Almost every insurance policy has language that addresses such losses, but the language varies a great deal. Any business that believes it has suffered a loss due to COVID-19 should at least have its policies reviewed by an expert who could try to determine whether there is any coverage.

Finally, do not underestimate the power of simple communication. These are extraordinary times and a party on the other side of a contract may also be facing challenges to performance. Flagging potential delays and disruptions in performance early can ensure a meeting of the minds and a leveling of expectations. Additionally, a party may have obligations to provide notice or take other mitigation efforts in the event of nonperformance. Early communication may help an organization meet those obligations.

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