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Panic Button: Can You Use COVID-19 to Get Out of Contracts?

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By Erik Kravets 04-09-2020 03:08:48

In the shifting sands of the COVID-19 pandemic, contracts – with their commitments and obligations – can seem like a straitjacket. In this “new normal?” one side of the agreement may be asking, why do I have to still perform as if nothing has happened? Flexibility is king right now; and the world seems to be broken down simply into those that have it and those that don’t

Due to the uncertainty, nobody is sure if they can rely on others or even if they can be relied on to do their part in an agreement. Amidst this breakdown of trust, it’s tempting to start smashing the ‘Panic Button’. Just get out of the contract, whatever it takes! Make for the exits! Every man for himself!

Many ways exist to “get out of a contract,” but so far the topic getting the most attention in legal circles is the seldom-used but ever-seductive trump card: the force majeure clause. These clauses – be they “vis maior” or “acts of god” or similar -- are included as standard in many contracts. They often are included almost subconsciously, often in boilerplate form and they are rarely practically relevant. Still, they get dusted off when nothing else will do. Isn’t it tempting to try and make those vestigial force majeure clauses finally do some work for you – isn’t this their moment to shine?

Besides, COVID-19 is really scary; so, isn’t that classic force majeure?

As with any legal question, the correct answer is: it depends. And not just on what’s in your contract, i.e. in your force majeure clause, but on your jurisdiction. It also depends on what “COVID-19” means. Does it mean the disease itself, or the government measures designed to mitigate it?

Debates rage, of course, on differing levels of testing and reporting country by country, but broadly speaking, as I write this, roughly 1.5 million cases of COVID-19 have been reported worldwide. In other words, 0.02% of the world’s population – a fraction of a fraction of a percent – has been infected by COVID-19. To contrast this with the seasonal influenza, according to the U.S. Centers for Disease Control (CDC), between October 1, 2019 and March 28, 2020, there were between 39,000,000 and 55,000,000 influenza infections, with 24,000 – 63,000 deaths, all in only the United States.  But in response to COVID-19, according to the British Broadcasting Corporation (BBC), over 100 countries worldwide have instituted full or partial lockdowns in response to COVID-19, “affecting billions (…).” Nepal, Malaysia, Uzbekistan, Laos, Croatia, Monaco, Ecuador, Aruba and many other unlikely places have all put their countries on national lockdowns, halting trade and social interaction. 

The likelihood that you are directly affected, e.g., hospitalized or sick, due to COVID-19 is infinitesimal. But it’s a virtual certainty that you are affected by a government-initiated mitigation effort.

When thinking about any given contract, is it hard to perform because of COVID-19? Or is it really hard to perform because one or several governments have ordered lockdowns and restrictions?

Put another way: if the lockdowns and restrictions disappeared tomorrow, would COVID-19, all on its own, be enough to stop you from following through on your contractual obligations?
This is important because force majeure, which has its origin in Roman law’s ‘vis maior’ (superior force) concept, relates chiefly to events caused by nature (or god), which cannot be controlled by humankind. Earthquakes, storms, floods, could qualify – anything that puts into stark relief the weakness of men and women and their powerlessness in the face of uncontrollable events. These events are usually sudden, unforeseeable, unstoppable and beyond the control of any of the parties involved.

So, what of COVID-19? Gaius, the Roman jurist who had a defining influence on the development of the law during the peak of the empire, argued in Digest 13, 6, 5, 4 that disasters and collapsing buildings counted among the cases of ‘vis maior’, and perhaps even illness if it was not due to anybody’s fault. A terrible plague or a disease beyond ability to cope would probably qualify.

In the following centuries, government actions, strikes and even war have been incorporated under the ‘vis maior’ definition – which eventually became known under its French guise, ‘force majeure’. The key change was to include not just natural events, but events due to human causation, as well. In South African law, which derives many ideas from Roman law, ‘force majeure’ might well include government instigated anti-COVID-19 measures, subjecting contracts under that law to ‘force majeure’.

And herein lies the locus of conflict between those who seek to invoke ‘force majeure’ and those who are skeptical: some think natural events, acts of god, are the only true triggers for force majeure, while others hold the view that human-caused events – as long as they are unavoidable, exceptional, extraordinary and unforeseeable – can also qualify. German law, for example, takes a more restrictive approach: terrorism, for example, is not held to be ‘force majeure’ because it is not something that originates in forces of nature. French law also distinguishes between ‘force majeure’, being natural, and ‘cas fortuit’, being human-caused accidents. There is bleed-over in all cases, however.

While it’s tempting to grasp at force majeure, keep in mind that most legal systems offer a plethora of other options for dealing with government lockdowns. For example, in German law the doctrines of impossibility (nothing impossible can constitute an obligation) and frustration (if contractual assumptions shift massively, then each party can demand an adjustment of terms) could apply. While ‘force majeure’ ordinarily excludes liability, frustration and impossibility may offer fault-based damages or the possibility to recover the contractual relationship by fine-tuning some of the clauses.

The key is that proving impossibility and frustration is likely much easier than proving ‘force majeure’.

Each legal system has ways of dealing with government lockdowns on this scale. The ‘Panic Button’ manifested in ‘force majeure’ clauses may not be appropriate. On this point, the Copenhagen-based Danish shipowner’s organization BIMCO recently republished its ‘Infectious or Contagious Diseases Clause for Time/Voyage Charter Parties 2015’ precisely because its standard-language force majeure clause does not encompass COVID-19 or its related government-caused risks.

In considering next steps, if you’re up against the wall, remember to look at the actual contract. Don’t get swept up in the panic. Adjusting the contract, postponing it or linking it to specific conditions (e.g. the lifting of a lockdown by a certain date) may all be preferable to invoking force majeure.

It may help to remember that literally billions of us are all in the same boat, but some of us have better equipment. The other side may be just as eager as you to sit down and talk about how to put a contract on solid footing again. Often, old business relationships and one’s reputation may be at stake. Then again, invoking force majeure – hitting that big, red Panic Button – may harden fronts and lead to superfluous fights in court. Keep in mind as well that invoking force majeure can be procedurally complicated, which leads me again to the advice above: check the contract. 

The reasons for invoking force majeure – higher costs for performance, excluding performance, lack of interest in the consideration offered by the other party, hardship, restrictions which make it too difficult – would all, in any case, need to be argued and substantiated. That’s harder to do than many people think because ‘force majeure’ originally, and still, chiefly relates to us being at the whim of higher powers. By comparison, it’s much easier to show that your cargo was destroyed by a volcano. Or, for example, that the government lockdown means it’s impossible to get your cargo to a ship! These aren’t forces of nature – but that doesn’t mean that there’s no law on the books that can help you.

So, even if governments think their laws are acts of god, don’t switch your religion just yet…

Erik Kravets is the founding partner of Kravets and Kravets, a maritime and admiralty law firm based in Cuxhaven, Germany. He is also a lecturer at the State Maritime College of Cuxhaven and Bremerhaven University of Applied Sciences, and he is a regular contributor to The Maritime Executive Magazine. 

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.