COVID-19 is a terrible health and economic scourge, but we can and should learn from it. The United States has not experienced an epidemic like this one in more than a hundred years; consequently, we can be excused for having believed that we did not have to deal with business-closing epidemics in our documents. In the future, it will be hard for us to claim that major pandemics are not foreseeable. Drafters need to think through the changes we’ll make in our contract language going forward.
Defining Act of God and Force Majeure
Only time and litigation will tell us the flaws in our pre-coronavirus force majeure boilerplate provisions. We already knew that the term act of God is narrow and means “an extraordinary hurricane, tornado, flood, or earthquake caused by nature,” not events caused by humans. Chris Chocheles, Since It’s Hurricane Season ... What Is Force Majeure and Why Should You Include It in Your Documents?, 30 Prob. & Prop. 64 (Sept./Oct. 2016). Force majeure is broader and encompasses “acts not only of nature, but also of people.” Bryan A. Garner, A Dictionary of Modern Legal Usage 366 (2d ed. 1995). But whether act of God, alone or coupled with force majeure, includes fear of infection by a virus or a government order arising from that fear remains to be determined—by litigation.
Some drafters will add “epidemics requiring closure” or “pandemics as declared by the World Health Organization” to their litany of force majeure events. And why not? We commonly include “war” in that litany even though the continental United States has not suffered physical damage from war since the late 1800s. Others will simply be sure that their documents specify that force majeure includes “governmental actions and directives” and “other events beyond the control of the party whose performance is required.” But all will pay more attention to the definition of force majeure.
The Effect of Force Majeure on Contract Performance
If a standard force majeure definition includes pandemic-induced business closures, what does this force majeure event mean for the parties? Most force majeure clauses state that if performance of a party’s obligation is made impossible by a force majeure event, then the performance is excused until it is again possible. But does COVID-19 truly render impossible the performance of an obligation to pay money? The banks are still open, and payments can still physically be made. This issue has no current answer and unquestionably will be widely litigated. But what have we learned?
For now, we’ve learned a couple of things. First, if the drafter does not want force majeure to delay or excuse payment obligations, the drafter should say so expressly in the contract. Second, if the drafter wants some of the client’s payment or other monetary obligations to be excused when the other party cannot perform, or, in a lease, when the client cannot occupy its leased space, the drafter should again say so expressly in the contract. These provisions will undoubtedly be negotiated vigorously, but at least the parties to the contract will have thought through the issues and understand which party will bear the risk of an event like COVID-19.
Time for Performance
Particularly in a purchase agreement, the deadline for closing is critical. Real estate lawyers have already adopted some provisions that extend the required closing when specified events of limited duration that make performance impractical. For example, flood insurance cannot be purchased when there’s a named storm in the Gulf of Mexico; consequently, at least one standard Florida residential purchase agreement provides that if “extreme weather” causes the insurance to be unavailable, then all time periods, including the closing date, are extended, but not for more than 30 days. Northeast Florida Association of Realtors, Inc., Purchase and Sale Agreement ¶ 3(B), available at https://bit.ly/3aNPzbr.
COVID-19 not only closed some title company offices but also closed some local government real estate recording offices, making title searches and recording difficult or impossible. When representing buyers, we should now foresee this real possibility and provide that if the local land records and recording office are closed because of health concerns or another force majeure, the diligence period and time for closing are extended for the length of this closure. Both sellers and buyers will want the right to terminate the purchase agreement if the closing is extended for longer than a fixed period, but at least they will understand their rights.
We can’t anticipate everything, but we can now anticipate epidemics that require area-wide business closures. From now on, when preparing our documents, we need to use our current experience to anticipate these real challenges to performance, and we need to draft accordingly.