By Matthew Zwiren
No matter the type of contract – whether it be real estate, employment, vendor, or otherwise – Covid-19 has changed the contract negotiation landscape for good. Because of governmentally-imposed-lockdowns, business shutdowns and closings, and other restrictions on economic activity and people’s mobility, prudent contract draftspeople must reflect and prepare for the new reality in which we live. Although the pandemic has, according to what we hear on the news, seemingly wound down, and many industries have otherwise relatively returned to “normal,” contracts must still account for the possibility of such an emergency happening again. As such, new provisions that account for the possibility of another emergency – that may lead to similar lockdowns, closings, and whatever else life may throw at us – are becoming standard clauses in many types of contracts.
Perhaps the biggest post-Covid-19 change to the world of contracts has been the redrafting of the standard force majeure clause. A force majeure clause “allocates the risk of loss if performance is hindered, delayed, or prevented because of an event that the parties could not have anticipated or controlled. It provides a contractual defense, the scope and effect of which will depend on the express terms of a particular contract.”1 There are four necessary elements of a force majeure clause, which are as follows:
(1) it must define the breach which can be excused;
(2) it must define the event;
(3) it must define the connection between the breach and event; and
(4) it must explain what will happen if the performance is excused.2
For example, a force majeure event in action would go as follows: Say there is a contract between a vendor and vendee – the provision would state that
(1) the breach (that can be excused) was that the vendor failed to make a shipment for a specific month;
(2) during the month in question, a tornado damaged the warehouse in which the vendor stored his goods;
(3) because the warehouse was damaged, the vendor was unable to ship their goods to the vendee in a timely manner; and
(4) because of the tornado and its resulting damage to the warehouse, the vendor will not be held in breach because of its failure to ship the goods during the month in question, provided that the vendor ships those goods by the end of the subsequent month.
The wording of a force majeure provision affects how a court will interpret the force majeure event, its impact on the affected party’s ability to perform, and the respective parties’ rights and obligations resulting therefrom. If the language of the clause is broad and all-encompassing, there is a chance that emergencies, such as a pandemic, may be included in the possible list of events. This was backed by the decision in JN Contemporary Art LLC v. Phillips Auctioneers LLC, No. 20-cv-4370 (S.D.N.Y. Dec. 16, 2020), which found that the word pandemic was included in the force majeure definition of “natural disaster.”3 Despite the fact that a court may hold these broad interpretations to encompass many different outcomes, it is beneficial to include as many potential force majeure events as possible in order to provide the client with the most protection possible. For example, many provisions will now include situations such as lockdowns and forced business closings by the government. Being as specific as possible ensures that, in the case of a specific emergency that hinders the performance of a contract, the non-performing party will be protected if such a situation arises. It is the duty of the drafting attorney to ensure that their client is protected from being held in default under a contract if they are unable to perform due to unforeseen and uncontrollable circumstances.
When negotiating and drafting a contract it is important to protect your client from as much liability as possible. Today’s contracts should contain carefully-crafted force majeure provisions relating to pandemics, potential lockdowns, other natural disasters, acts of God, and similar uncontrollable circumstances – all in an attempt to prevent, or at least limit, exposure to liability when performance of said contract becomes out of your control.
For more information or help with negotiating and drafting these contracts and force majeure clauses, contact the experienced Transactional Division attorneys at KI Legal.
_____________________________________________________________________________________________
1 Paula M Bagger, The Importance of Force Majeure Clauses in the COVID-19 Era Americanbar.org (2021), https://www.americanbar.org/groups/litigation/committees/commercial-business/boilerplate-contracts/force-majeure-clauses-contracts-covid-19/#:~:text=A%20force%20majeure%20clause%20allocates,terms%20of%20a%20particular%20contract.
2 Id.
3 JN Contemporary Art LLC v. Phillips Auctioneers LLC, No. 20-cv-4370 (S.D.N.Y. Dec. 16, 2020)
ATTORNEY ADVERTISING – This information is the most up to date news available as of the date posted. Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team.
_____________________________________________________________________________________________
KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum. KI Legal’s services generally fall under three broad-based practice group areas: Transactions, Litigation and General Counsel. Its extensive client base is primarily made up of real estate developers, managers, owners and operators, lending institutions, restaurant and hospitality groups, construction companies, investment funds, and asset management firms. KI Legal’s unwavering reputation for diligent and thoughtful representation has been established and sustained by its strong team of reputable attorneys and staff. For the latest updates, follow KI Legal on LinkedIn, Facebook, and Instagram. For more information, visit kilegal.com.
The post Force Majeure and Negotiating Contracts in Post-COVID World appeared first on KI Legal.