Will COVID-19 trigger 'act of God' contract provisions?

Now is the time for subcontractors to review the obscure contract provision better known as the "force majeure" clause.

The COVID-19 pandemic is still with us, and with it some renewed interest in the oft-considered obscure contract provision better known as the “force majeure” clause.

Force majeure clauses are found in a number of agreements from leases, vendor contracts, licensing agreements and of course subcontracts to include those found in government subcontracts.

According to Black’s Law Dictionary (yes there is a dictionary just for lawyers), the term force majeure comes from the French phrase meaning “superior or irresistible force.” Many have referred to this type of clause as an “Act of God” clause. And, of course, Black’s defines that as well: “An act occasioned exclusively by violence of nature without the interference of any human agency.”

In plain English, a force majeure in a contractual sense is where an extraordinary or unforeseeable event beyond the control of one party prevents it from performing the contract. Put another way, if that event occurs, it may alter the contractual parties’ obligations. Although there can be dozens of circumstances or events that may constitute a force majeure event, typical examples include war, riots, earthquakes, weather events, labor strikes, and of course epidemics.

Depending on its specific language, force majeure language may allow for delay in performance or excused performance, either partially or completely. Or it may provide a party the ability to outright terminate the contract. The latter remedy is less common. Usually the force majeure clause will buy some time – that is, allow for a delay of performance or a slip in a delivery schedule. It typically is not (but can be) a “get out of jail free” card in terms of overall performance obligations. 

I’ve seen many a lawyer and contract manager just skip these clauses as not worthy of review because, well, what are the chances that the Almighty will reign down with a seismic disaster, a devastating tsunami or a global pandemic? But in the world of COVID, which apparently is not going away anytime soon, we are now paying more attention to this language.

So, tying this in to the GovCon world, you won’t see a classic force majeure clause in a government prime contract. (And if you do let me know and I’ll retire after 35 years on the job not seeing one). These clauses are normally found in subcontracts and other commercial agreements such as vendor agreements, leases and some consulting and professional services agreements, among others. 

For something at least conceptually similar in Government prime contracts look for the standard (and mandatory) FAR 52.249-14 clause, also known as the Excusable Delays Clause or EDC. The EDC, which is used for cost reimbursement, time-and-materials and labor-hour type contracts, provides that contract performance delays may be excusable if they are “beyond the control and without the fault or negligence of the contractor.” The clause uses the following examples: “(1) acts of God or of the public enemy, (2) acts of the Government in either its sovereign or contractual capacity, (3) fires, (4) floods, (5) epidemics, (6) quarantine restrictions, (7) strikes, (8) freight embargoes, and (9) unusually severe weather.”

Is the COVID-19 pandemic an event that would trigger this clause? I doubt this has been an issue fully tested in the courts but consider this: an epidemic (covered by the EDC) is defined as a “widespread occurrence of an infectious disease in a community at a particular time.” A pandemic is that same infectious disease “prevalent over a whole country or the world.” So, a pandemic is an epidemic on steroids. You bet it triggers the EDC, or at least it should.

But whether COVID-19 is a qualifying event under a commercial force majeure clause and if so how it affects future contract performance depends on the particular language of that clause, and how that clause squares with other clauses included in the subcontract or other agreement. The best tip here is to carefully review your subcontract agreements to assure that (as a prime) your subcontractor is not able to completely escape its performance obligations under a broad force majeure clause and that (as a sub) your rights are spelled out in the event that performance may be delayed or subject to outright termination under such a clause. The bottom line is that, especially with COVID, conflicting provisions in any agreement are a recipe for litigation.

A few other things to consider about the EDC and its comparison with the commercially drafted force majeure clause:

First, the EDC provides that the contractor (or subcontractor) will not be in default where a failure of timely performance is caused by any of the above-stated (or perhaps similar) events. Thus, it allows a delay in performance; it does not excuse performance itself. It can, however, be the basis of a later claim against the government for delay-related costs incurred. Also, a prime contractor cannot invoke this clause if it or its subcontractor has defaulted for other reasons.

Second, considering the limited reach of the EDC, it may be ill-advised for a Government prime contractor to allow for a subcontract force majeure provision that may be interpreted to excuse performance or allow termination of the subcontract due to a force majeure event, like COVID-19, while the prime can only delay performance under the EDC. A subcontract may (and I’ve seen more than a few that do) contain a broad force majeure clause while at the same time incorporating the EDC, causing the subcontract to contain conflicting and potentially ambiguous language, especially if the subcontract contains no order of precedent provision that elevates incorporated FAR clauses over conflicting subcontract language. 

Third, in any proposed agreement containing a force majeure clause, it is prudent to review it carefully to determine whether it serves your particular business interests. There may (and I underscore may) be a situation where a subcontractor should seek a robust force majeure clause that provides more protection than the EDC, such as one that may provide for a contract revision or termination. This may be especially warranted where a particular extraordinary event like COVID or any similar event will completely prevent performance or delivery by the subcontractor, or where the non-occurrence of such an event is a basic assumption upon which the agreement was made. That will depend on the circumstances of the subcontract and its deliverables. But in the end consider the fairness of that when the prime is stuck with the more limited EDC and may be on the hook if the subcontractor fails completely to perform.

Finally, there are some common-law (i.e., the ones made by the courts) remedies that may be available even absent a force majeure clause, such as frustration, impracticality or impossibility of performance. These issues are way beyond the scope of this commentary but suffice it to say that they are not a simple as they sound and their application can be limited.

With COVID-19, force majeure clauses are now getting their just due. Just as your business is nuanced, there are a number of different force majeure clause variations. In fact, there are more variations of these clauses than opinions on wearing PPE to prevent COVID.

Stay safe.