Does COVID-19 qualify as an act of God under the force majeure clause in a contract?
This year, the China Council for the Promotion of International Trade (CCPIT) has issued over 4800 force majeure certificates to Chinese businesses that have not been able to fulfil their contractual obligations due to the Corona Virus. The COVID-19 virus, dubbed a “pandemic” by the WHO, has surpassed 500,000 cases globally.Would you say the novel COVID-19 qualifies as a force majeure, that is an act of God?
On the surface I’m sure you’d give a firm yes. But it’s not that simple. If I were a lawyer, I’d type more confidently. So, this is just an opinion piece with real gems from a real lawyer and a real law firm.
Usually, when business is done under a strong legal framework but with a healthy amount of good faith, one wouldn’t hasten to tag a hiccup as a dispute. Many times have I made and received calls where it’s a more of “how best do we handle this” than “you failed, be penalised”.
Nevertheless, lockdowns, curfews, travel restrictions, restrictions on port activities and other government actions can cost companies a lot of money. At a juncture like this, labels go out the door. It’s becomes all about who carries the cost and other liabilities.
The litmus test, in my opinion, is whether the “act of god” or exact wording in the force majeure clause, even when proven to be true, actually affected the ability of the party making the claim to execute the contract. If you call on this, then the burden of proof is on you to prove.
It goes even deeper than that but Kim puts it best.
Kim VandenAkker is the Legal Counsel for Western Digital and has worked on many procurement contracts out of the company’s office in Irvine, California. From Kim,
“The interpretation of any given force majeure clause will depend on the specific contract and how the clause was drafted in that contract, as well as the law in the relevant jurisdiction. The courts in many jurisdictions, however, interpret ‘acts of God’ narrowly to refer only to natural disasters such as hurricanes, earthquakes, and the like.
If the force majeure clause refers only to ‘acts of God’ and does not contain other helpful language, a party may have a difficult time arguing a pandemic like COVID-19 qualifies to trigger the clause.
On the other hand, if the force majeure clause includes, for example, a reference to government actions, a party may find success in triggering the clause by pointing to certain government orders and restrictions that have resulted from COVID-19.
Again, in each case it will depend on the facts and circumstances of the specific contract and scenario, and certain jurisdictions may be more lenient than others when it comes to interpreting force majeure clauses.”
To further illustrate her point, she sent me a very helpful article from the Gibson Dunn Law Firm that outlines a “4-Step Checklist and Flowchart to review and assess force majeure clauses”. You can find the full article at bit.ly/3dwCLZm.
Here it is, for those reading this in print.
Step 1. Does COVID-19 trigger the force majeure clause?
| Does the force majeure clause broadly cover events caused by conditions beyond the reasonable control of the performing party without enumerating specific events? | No ☐ | Yes ☐ | If yes, proceed to Step 2. Inquiry should also be made into what additional elements a party may need to demonstrate based on the applicable law. Some courts may require a party invoking a force majeure provision to demonstrate that the triggering event was beyond its control and without its fault or negligence and that it made efforts to perform its contractual duties despite the occurrence of the event. | |
| Does the force majeure clause specifically reference an “epidemic,” “pandemic,” “disease outbreak,” or “public health crisis”? | No ☐ | Yes ☐ | If yes, proceed to Step 2. Inquiry should also be made into what additional elements a party may need to demonstrate based on the applicable law. Some courts may require a party invoking a force majeure provision to demonstrate that the triggering event was beyond its control and without its fault or negligence and that it made efforts to perform its contractual duties despite the occurrence of the event. | |
| Does the force majeure clause refer specifically to “acts of civil or military authority,” “acts, regulations, or laws of any government,” or “government order or regulation”? | No ☐ | Yes ☐ | If yes, proceed to Step 2. Inquiry should also be made into what additional elements a party may need to demonstrate based on the applicable law. Some courts may require a party invoking a force majeure provision to demonstrate that the triggering event was beyond its control and without its fault or negligence and that it made efforts to perform its contractual duties despite the occurrence of the event. | |
| Does the force majeure clause cover only “acts of God”? | No ☐ | Yes ☐ | If yes, under leading current case law, the force majeure clause may not have been triggered by the current pandemic. Many courts have interpreted the phrase “act of God” in a force majeure clause in a limited manner, encompassing only natural disasters like floods, earthquakes, volcanic eruptions, tornadoes, hurricanes, and blizzards. The common law doctrine of impossibility or commercial impracticability may still apply, depending on the jurisdiction. | |
| Does the force majeure clause have a catchall provision that covers “any other cause whatsoever beyond the control of the respective party” and contains an enumeration of specific events that otherwise do not cover the current situation? | No ☐ | Yes ☐ | If yes, the force majeure clause may not have been triggered because courts generally interpret force majeure clauses narrowly and will not construe a general catch-all provision to cover externalities that are unlike those specifically enumerated in the balance of the clause. But depending on the jurisdiction, courts may look at whether the event was actually beyond the parties’ reasonable control and unforeseeable and the common law doctrine of impossibility or commercial impracticability may still apply, depending on the jurisdiction. |
Step 2. What is the standard of performance?
| Does the force majeure clause require performance of obligations to be “impossible” before contractual obligations are excused? | No ☐ | Yes ☐ | If yes, the force majeure clause may have been triggered if the current government regulations specifically prohibit the fulfilment of contractual obligations. Proceed to Step 3. | |
| Does the force majeure clause require only that performance would be “inadvisable” or “commercially impractical”? | No ☐ | Yes ☐ | If yes, the force majeure clause may have been triggered due to the extreme disruptions caused by COVID-19. Proceed to Step 3. |
Step 3. When must notice be given?
| Does the contract require notice? | No ☐ | Yes ☐ | If yes, proceed to Step 4. Timely notice must be provided in accordance with the notice provision, or termination may not be available even though a triggering event has occurred. Some notice provisions required notice in advance of performance due. Others required notice withina certain number of days of the triggering event. |
Step 4. Are there requirements for the form of notice?
| Does the contract contain specific provisions for the method of notice? | No ☐ | Yes ☐ | If yes, notice provisions may specify the form of the notice, to whom it must be sent, and the manner in which it must be sent. Specific notice language may also be required. | |
| Does the contract require specific language to give notice of a force majeure event? | No ☐ | Yes ☐ | If yes, determine whether required wording is present in any notice. Some contracts may even have form of notices attached as exhibits to the contract. | |
| Does the contract specify a specific method for delivery of such notice? | No ☐ | Yes ☐ | If yes, notice may be required by email, priority mail, or through use of a particular form addressed to specific people. |
In the event that the contract does not have a force majeure clause, the Gibson Dunn Law Firm article adds that,
“Whether or not the contract contains a force majeure clause, the common law doctrines of impossibility or commercial impracticability may be available and legal analysis of such a claim should be conducted…
The party asserting this defence will bear the burden of proving that the event was unforeseeable and truly rendered performance impossible, and the doctrine generally is applied narrowly…
if an agreement does not have a force majeure or “act of god” clause, an analysis under the doctrine of impossibility or commercial impracticability, depending on the jurisdiction, may be warranted.”
Have a lovely week!
Maxwell Ampong is the CEO of Maxwell Investments Group, a Trading and Business Solutions provider. He is also the Business Advisor for the General Agricultural Workers’ Union of TUC (Gh). He writes about trending and relevant economic topics, and general perspective pieces.
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