On today’s show we’re talking about a French term that is often appearing in contracts, and insurance agreements. That term is "Force Majeure".
As of today’s show, the World Health Organization has declared the novel coronavirus (COVID-19) a pandemic; states of emergency have been declared in multiple states and provinces all over the world.
There is no doubt that COVID-19 has and will continue to have, an adverse impact on the global economy. With disruption to supply chains, international travel, and business operations, many individuals and businesses may be unable to fulfil their existing contractual obligations.
On today’s show we’re going to take a deeper look at Force Majeure and whether it could, or perhaps already has impacted you.
Force Majeure clauses are generally included in contracts to account for circumstances where a party cannot perform the contract due to circumstances beyond its control.
A Force Majeure clause typically operates to absolve the non-performing party of liability for its failure to meet contractual obligations as a result of an extenuating circumstance, but its precise effect will depend on the language of the provision in the contract.
Some contracts treat Force Majeure as an “Act of God”. These events would then trigger their operation of that contract’s clause. Common cases include hurricanes and earthquakes.
So the question is whether Covid-19 would meet the definition.
Some contracts spell out a laundry list of events that fall within the scope a circumstance beyond the control of the parties, such as acts of terrorism, war, labour disputes, strikes, or adverse weather conditions.
However, given the current state of affairs, it is likely that a court will find that COVID-19 is an unforeseeable event outside the control of either party. Whether COVID-19 makes it impossible for a party to fulfill their contractual obligations is a different matter. The obligations cannot simply be more difficult to fulfill; they must be impossible. The determination of these questions will be both fact- and contract-specific.
One of the most common contracts that developers and investors encounter is the AIA-101 contract. The AIA contracts are industry standard contracts that are widely accepted across the industry and are used by many general contractors.
The AIA-101 has a second document called the AIA-201. This document contains the general conditions that apply to the AIA-101 contract. The AIA-201 has section 8.3 which deals with the topic of delays.
This section deals with a lengthy list of the usual causes of delay like labor disputes, fire, adverse weather and so on. If none of those possible causes of delay have triggered an allowable delay, then there is a fifth item
“by other reasonable causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.”
This is an example of a contract that has a force majeure clause.
The one place I expected to find a force majeure clause was the standard agreement of purchase and sale. A review of several states and provinces, could not able to find a force majeure clause in any of the standard agreements.
This has given rise to what many realtors are not calling a Covid clause. For new contracts being written in the current environment, many buyers are including a provision which would allow them not to close if the Covid-19 conditions make it impossible to close. The wording I’ve seen for one such clause was extremely broad. It basically said that if the buyer didn’t want to close, they could blame the virus and be off the hook.
If you have a contract that you’re negotiating, or perhaps a contract that you’ve already signed, I recommend that you go read the Force Majeure language in it.