After Health… Businesses Must Consider Legal & Economic Impacts of COVID-19

Did someone say force majeure?

Force Majeure Clauses

COVID-19 Pandemic and Force Majeure clauses

According to Black’s Law Dictionary, force majeure is defined as “An event or effect that can be neither anticipated nor controlled.”   It is generally viewed as an unexpected event that prevents someone from doing or completing something that he or she had agreed to do.  The term is usually applied to acts of God (such as floods and hurricanes), riots, strikes and wars.  It is unclear, however, if the term includes an epidemic, such as COVID-19.   That legal term for unforeseen circumstances resulting in non-fulfillment of a contract is likely to be invoked widely this spring and summer as businesses are unable to make good on commitments due to the corona virus crisis.

There also will be much discussion of whether business interruption or other insurance policies could be used to defray losses and whether businesses can recover damages when contracts are canceled.

As Chicago Business Lawyers we have been scrutinizing our clients’ business contracts to see whether and how they include force majeure clauses, generally understood to include events like war or natural disasters.  Since incidents like the September 11 attacks and Superstorm Sandy, courts have been scrutinizing such clauses a bit more closely.   Force majeure clauses typically include the phrase “act of God,” a generic term not meant to promote anyone’s religious point of view, but whether they include words like “epidemic” or “pandemic” will vary.  If the list of unforeseeable events does not include the phrase epidemic or pandemic, will COVID-19 be considered an excusable “act of God” to forgive performance?   And how broadly courts interpret such terms varies as well, although with each passing day it gets harder to imagine the corona virus crisis wouldn’t typically qualify.  This issue will play out in the courts.

On the insurance front, companies first should examine their business interruption policy, generally geared toward direct physical losses of the sort that might not be as obvious with coronavirus—although workplace closings due to the contamination might well apply.

Losses of key suppliers or customers could fall under “dependent property” insurance claims, which cover damage to other organizations that the insured party depends upon and whose demise has resulted in reduced income and/or greater expenses for the insured party.

Businesses facing potential breaches of contract should evaluate their contracts and insurance policies, and then continue to monitor breaking news on event cancellations, travel restrictions and state of emergency declaration nationally or locally. These will make force majeure easier to declare. They also should keep detailed records on why and how they lost business so they can document those in court.

Claims facing businesses could range from missed deadlines, to not taking adequate steps to protect people — such as work events where employees have been exposed — to cases of shareholders who believe their companies did not respond appropriately to the pandemic, costing their investments more than otherwise would have been the case.

Suits also could be filed against governments on the grounds that they haven’t adequately balanced public health and individual rights; a couple such suits already filed have related to quarantining of cruise passengers suspected of carrying corona virus.

Most of all, businesses – including Chicago Business Owners – need to keep in mind that this crisis has been changing day by day, even hour by hour. They might need to adjust policies like allowing employees to work from home, or enabling them to take additional sick leave so they will definitely stay home if they become symptomatic.

Ultimately, businesses will need to be nimble: The correct answers to these issues and others might be different on Friday than they were on Monday. In other words, it’s unforeseeable when the next set of unforeseen circumstances might be.

And may the force majeure be with you!