by Jarrad Wright
In recent days, daily life in Northern Virginia, the Washington D.C. metro area, and throughout the United States has been disrupted with school closures and mandates from public health officials. As of now, the economic impact of the Coronavirus (COVID–19) pandemic is unknown. While the length and extent of the economic impact is unknown, companies of all sizes are preparing contingencies. Part of that preparation is analyzing current and future contractual obligations. A key issue for any company or individuals that have contractual obligations is the potential impact of force majeure clauses.
Commonly known as “acts of God” clauses, force majeure clauses in contracts allow a party to not perform a contract obligation due to certain unforeseeable circumstances. These circumstances often include natural disasters and may include terrorism cases. Whether or not pandemics such as COVID-19 are implicated is a question that will be governed by the language of the contract at issue and may be impacted by the various governmental emergency declarations that have been issued in recent days. Force majeure clauses are present in a variety of contracts including leases, insurance agreements, travel insurance, supplier agreements, government contracts, and building contracts.
While it is impossible to know precisely the impact of COVID-19 and whether and how long quarantines may apply, countries such as Italy, France, and Spain have already imposed quarantines overseas. In the United States, Ohio has ordered that bars and restaurants must close indoor dining and New York has ordered movie theaters, gyms, bars and restaurant closures. On March 15, 2020, the Centers for Disease Control and Prevention issued updated guidance recommending that events over fifty people be cancelled. While the guidance does not apply to schools, universities, or businesses, the guidance applies to other gatherings such as weddings, parades, festivals, concerts and sporting events.
While public health is paramount, business impacted by closures or reduced business opportunities are facing questions as to whether they can or have to meet their contractual obligations. Careful analysis of the language of the particular force majeure in each contract at issue is important as force majeure is a contractual creation and the parties’ contract generally govern. In order to understand a provision, the applicable state contracting law that applies should be analyzed carefully.
After the September 11th attacks, business losses resulted in litigation over the applicability of force majeure. Business can expect such issues to once again come to the forefront as the implications of the virus become clear. For example, in the insurance context, the application of business interruption insurance and whether or not a pandemic applies is a source of likely disputes as is insurance disputes over losses incurred because of orders issued by civil authorities when combatting the virus. In the business context, the ability to perform government contracts and service contracts, and whether such non-performance is excused is likely to be litigated.
Accordingly, business should prepare as best they can for the unforeseeable. By staying knowledgeable about the current situation and by carefully reviewing all key insurance agreements or other agreements potentially impacted by the virus, companies and individuals begin to plan on how to deal with the economic and business disruptions. This is even more important for companies and individuals contemplating entering into new agreements.
DiMuroGinsberg has decades of experience in counseling about and litigating business disputes in the Northern Virginia and D.C. metro area and stands ready to answer questions about force majeure and related business disputes that may arise. If you have any questions or an issue you’d like to discuss, please call us at 703-684-4334.