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The Legal Clause You Must Know in a Pandemic

“Force majeure” is a rarely used and often mentioned clause in the fine print of a contract. In the wake of the current unprecedented COVID-19 crisis, it has suddenly become the most worth understanding Legal Clause in a Pandemic. This is because the current pandemic is causing the sudden and unexpected cancellation of all manner of contracts, thereby bringing into sharp focus the formerly obscure notion of force majeure and its common law variant, frustration of contract.

To put it in simple words, “force majeure” means an unforeseeable event, or “Act of God”. A lot of contracts—consumer and commercial alike—contain such a clause. This clause is usually tucked away at the end of the document, and often written in boilerplate language. In effect, a force majeure clause is what is known as a “condition subsequent”. It means that, once the parties begin to perform their obligations under a contract, some event occurs that causes the contract to end (or in some cases to be suspended for a specified period of time). As far as the force majeure clause is concerned, those “events” are things beyond the parties’ control, such as “natural disasters and other Acts of God”. Consequently, the parties’ obligations are rendered impossible (or nearly so), and they are released, or discharged, from those obligations.

There could be another situation – viz., “What if a contract does not include a force majeure clause?” Here, one must know that if an external event renders continued obligations impossible, then that contract would be governed by the common law doctrine of “frustration”. Although this legal concept will apply automatically, typically it is applied more narrowly than a properly written force majeure clause.

A series of unfortunate events

One may wonder, what would amount to an “Act of God”? Strangely, there is not a lot of case law to guide us on this concept. Natural disasters, like earthquakes and hurricanes, certainly qualify. But companies frequently include other events beyond natural disasters in their force majeure clauses, including labour strife, political upheaval and, especially since 9/11 incident in the US, “acts of terrorism”.

This brings us to today’s pressing question: Is the pandemic—and government orders to shut down businesses to quell the spread of the virus—an Act of God, therefore triggering a force majeure clause or frustration?

Well, to give a lawyer’s answer, it depends on various factors. Following the SARS outbreak, some court decisions in Hong Kong suggested that an epidemic would be considered a frustrating event. But the question is – does that mean every contract must now be considered terminated under force majeure by the onset of COVID-19? And, is every contract now impossible to perform?

Without doubt, any contractual obligation that is time sensitive could be seen as frustrated. For example, a construction company cannot finish putting up an apartment building by June 1 because the government has ordered construction sites to close. However, what if your client wants you to provide a legal opinion about the health and safety liabilities of that building site? It may be more challenging to answer this question.

There could be another situation – if you have potentially terminated contracts due to COVID-19, what then should you do? Experts suggest that you should review any ongoing contracts (contracts where there are uncompleted obligations) and see if there is a force majeure clause (hint: look at the end of your contract). Read that clause carefully and try to determine if it applies given the reality of our pandemic world. If it does apply, find out if the clause provides for loss allocation. And, of course, if the answer to any of these questions is not clear, you must contact your lawyer. All said, even in a pandemic, legal opinions can still be given!

These are then all the more reasons why you must clearly understand this most important Legal Clause in a Pandemic.

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