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Apr 3rd, 2020

Can force majeure save you from financial losses caused by the Coronavirus?

by Valeria Angelucci, Esq. and Huilin Bai, Law Clerk, Moris & Associates 

Can force majeure save you from financial losses caused by the Coronavirus?

Coronavirus outbreak has caused significant business interruptions. Some businesses are hoping to invoke force majeure clause to excuse nonperformance of contracts, especially commercial leases.

What is force majeure?

Force majeure excuses contractual nonperformance, when the nonperformance is caused by unforeseen events beyond the control of both parties that either make contract performance impracticable or frustrate the purpose of the performance.

Does COVID-19 qualify as a Force Majeure Event?

WHO declared COVID-19, aka Coronavirus, a pandemic. Therefore, if the force majeure clause stipulates specific events such as epidemics, quarantine, biological contamination or other public health emergency, Coronavirus is very likely to fall under this definition. In the aftermath of the 2003 SARS outbreak, courts in the PRC held that the outbreak was in the category of an epidemic for the purposes of force majeure, although that interpretation was not applied consistently elsewhere. If the force majeure clause is silent on pandemics, Coronavirus will not automatically constitute a force majeure. However, given that government announced restrictions on travel, movement, and large gatherings, another possible argument is “acts of government.” For example, some restaurants and bars, which are shutdown as a result of governmental order, as tenants in a commercial lease, might be able to invoke force majeure clause.

Companies invoking force majeure need to show that it is effectively impossible to perform their contractual duties as a result of breakout. Without governmental orders or regulations that make performance impossible, tenants’ nonperformance is unlikely to be excused only because of economic factors. For instance, commercial tenant to not construct new restaurant did not excuse its nonperformance pursuant to ground lease agreement's force majeure clause, even if global economic downturn caused drastic decline of tenant's stock price, forcing it to divert funds to meet its debt obligations and leverage thresholds, where parties' agreement limited contemplated force majeure events to those beyond nonperforming party's control, and tenant's decisions regarding allocation of its resources were within its control. Route 6 Outparcels, LLC v. Ruby Tuesday, Inc., 88 A.D.3d 1224, 931 N.Y.S.2d 436 (2011). Regardless, the party seeking to rely on the event of force majeure should give notice to the other party within a specified period.

What if the contract doesn’t have force majeure clause?

If a force majeure clause is absent from a contract, parties can still rely on the common law defenses:

  • Impossibility: performance is no longer objectively possible because of a supervening event.
  • Impracticability: a supervening event changes the inherent nature of performance, causing it to become more difficult, complex, or challenging, thereby contravening a basic assumption of the parties’ contract.
  • Frustration of purpose: when an unforeseen event undermines a party's principal purpose for entering into a contract, and both parties knew of the principal purpose at the time contract was made, the contract will be terminated.

In short, it is critical for the parties to stay calm and keep proactively and openly communicating with each other.