Force Majeure In The Covid-19 Era. Can It Save Your Business?

• Published date: 05 May 2020
• Author: Ms Miriam Tepperman and Linda Noorafkan
• Subject Matter: Corporate/Commercial Law, Coronavirus (COVID-19), Contracts and Commercial Law, Litigation, Contracts and Force Majeure
• Law Firm: Devry Smith Frank LLP

In these unprecedented times of COVID-19, business owners are facing unprecedented hardship and economic losses.

Contractually, how a party defines the parameters of Force Majeure/Act of God will be crucial to the interpretation. Legal consideration is highly recommended before a decision is made to not perform the terms of the contract. Heavy penalties can be granted for failure to live up to contractual obligations. However, if it is a valid Force Majeure event, your company may not be obligated to live up to the agreed upon contract. Similarly, if the party you contracted did not live up to its obligations you may have recourse depending on the wording of the Force Majeure clause.

Similarly a company should consider the insurance implications of a contract. Again, depending on how a company has contracted with its insurer, it may be eligible to receive business interruption benefits during this unprecedented time. This could mean the difference between bankruptcy and the survival of a business in these unchartered waters of COVID-19.

Force Majeure

According to the Black Law's Dictionary Force Majeure is defined as an "event or effect that can neither be anticipated or controlled". It is also referred to as an "Act of God".¹ This contractual term will help define a company's obligations under its contracts and whether a company may be entitled to insurance relief in this difficult time. There is little legislative or case law guidance on obligations for epidemics and potential pandemics. Legal advice should be sought to highlight your risks.

The Court places the burden of providing Force Majeure on the party intending to rely upon it to establish that compliance was impossible and not merely inconvenient or more difficult.²

Where to Begin

The first step is to look at the contract, whether it is a contract with a customer, supplier, vendor, etcetera.

Force Majeure clauses are not mandatory. If it is not included in the contract this would not be a viable defence for cancelling a contract. It may be that the Force Majeure clause will grant more time to fulfill a contractual obligation. It may allow a party to back out of the contractual obligation completely. It may provide relief that is contemplated in the contract. The Courts will look at the specific terms of the specific contracts.³

Once it is established there is a Force Majeure clause, the next step is to determine what types of situations it contemplates. Is it a broad clause? Does it using wording...