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Early Legal Fallout from Covid-19 Points to Force Majeure Clauses, But Contentious Litigation Sure To Follow

Coronavirus, Legal Developments, Liability, Litigation

The legal provision at the top of most people’s minds in the early stage of the Covid-19 pandemic is force majeure, a clause included in many contracts that excuses the fulfillment of its obligations by one of the parties in case of “acts of God” or government actions. While the widespread shutdowns ordered by governments around the world may qualify, some experts suggest that pandemics do not have as strong a precedent to be considered “acts of God” as earthquakes or weather-related natural disasters. [1]

With so many events cancelled overnight, many involved in planning such events are beginning to test the power and enforceability of these clauses. These actors are likely to be at the forefront of a much larger wave of force majeure invocations. Whether they can rely on force majeure clauses is less certain. Even for conference organizers or participants, the details of the clause will likely determine the outcome. [2]

Whether you are considering recovery options or are defending against breach of contract claims, there are numerous things to consider. Many force majeure clauses give parties the ability to create a roadmap of implications from a major event to allow planning and alleviate uncertainty, as well as to potentially stretch out the obligations over a longer time horizon.

As noted above, as government intervention increasingly becomes the proximate cause of contractual obligations failing to be fulfilled, it becomes somewhat more likely for force majeure invocations to prevail because there is greater precedent for government intervention (generally) than pandemics (specifically).

However, it remains very important to remember that force majeure clauses, though included in many contracts, often vary significantly so the requirements for successful invocation will also vary considerably. Moreover, different jurisdictions interpret these clauses differently, so it is critical that you receive counsel before making a decision. In addition to getting advice from an attorney, be sure to keep detailed records which show the scope of the interruption to your business as well as costs you have incurred or anticipate.

Looking to China, which appears to be furthest along the timeline of the pandemic, more than 4800 force majeure certificates have been issued as of the beginning of March due to the pandemic, relating to contracts worth $54 billion. However, with China by far the world’s largest exporter, much of its economy is bound up in international supply chains, greatly complicating force majeure claims. [3]

It is expected that these claims will hold up more effectively in cases between domestic firms, but international corporate law points to unenforceability. It will likely be more difficult for American firms to break obligations to international clients or customers than those based domestically.

[1] Loizos, C. (March 2020) Can Investors invoke Force Majeure clauses to get out of deals? Expect some to start trying from TechCrunch https://techcrunch.com/2020/03/16/can-investors-invoke-so-called-force-majeure-clauses-to-get-out-deals-expect-some-to-start-trying/ Accessed March 17 2020

[2] Davis, J. (March 2020) Force majeure contract clauses may alleviate coronavirus losses from Miami Herald https://www.miamiherald.com/news/business/biz-monday/article241100661.html Accessed March 17 2020

[3] Tan, H. (March 2020) China invokes ‘force majeure’ to protect businesses — but the companies may be in for a ‘rude awakening’ from CNBC https://www.cnbc.com/2020/03/06/coronavirus-impact-china-invokes-force-majeure-to-protect-businesses.html Accessed March 17 2020

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