Force Majeure

If My Company Cancels an Event Due to COVID-19, Are We Responsible for Payments?

 

COVID-19 and Force Majeure Provisions in Event Contracts

By Brian Polinsky, C.A.R. Associate Counsel

 

Updated on March 20, 2020

 

In response to the current COVID-19 epidemic, many REALTOR®associations and firms are cancelling previously planned events in order to promote social distancing and to avoid spreading the contagion.  Associations and companies may have entered into contracts related to these events, and now they need to cancel these contracts. Can a party cancel a contract without liability in the event of a viral epidemic? The answer to this question lies in the contract itself – and specifically in the section of the contract known as “Force Majeure.”

 

Key Takeaways:

 

  • Review event contracts ASAP, and calendar any deadlines to give notice to the other party.

  • Read the force majeure section of the contract to see if it contains language that would allow for a cancellation due to COVID-19.

  • Stay updated regarding news such as government bans on social gatherings, which may be force majeure events based on the language in your contracts.

  • Communicate with the other party and consider possible options such as postponement, concessions or other solutions. 

  • Aside from force majeure, check for liquidated damage provisions, and review any applicable insurance coverage; consider consulting with an attorney.

  • For future contracts, consider revising your contractual language.

 

What is “Force Majeure”?

 

Force majeure contract provisions relieve one or both parties from fulfilling their contractual obligations when circumstances outside their control arise. Examples often include natural disasters, technical failures, labor and government related events such as strikes and shutdowns, as well as wars and pandemics.

 

What does a “Force Majeure” contract provision typically include?

 

A force majeure provision will usually state a list of supervening events which, if one such event occurs, will allow a party to cancel the contract without liability. Companies and associations will want to check relevant contracts to see if “disease” or “epidemic” are listed as supervening events. Even if those specific words are not included, the COVID-19 pandemic may fall within broader terms such as “act of God” or “national or regional emergency.” The force majeure provision might also include catch-all language to cover non-specified supervening events such as “other unforeseeable circumstances of a comparable nature beyond the parties’ control.”

Additionally, many force majeure provisions include a notice requirement stating that the impacted party must give notice to the other party within a certain number of days of the force majeure event in order to cancel the contract. Companies and associations will want to review relevant contracts so that they know how much time they will have to act if they wish to cancel a contract. In some cases, the force majeure provision will require you to provide notice very quickly (for example, within 5 days of the force majeure event) – so don’t delay your review!

 

Does the current COVID-19 pandemic constitute a true “Force Majeure” event?

 

Typically, force majeure contract clauses only apply when a force majeure event makes performance of the contract “impossible” or “impracticable.” Governor Gavin Newsom’s March 19, 2020 “stay-at-home” order for the state of California, which bans social gatherings of any size, clearly makes performance of event agreements illegal and thus impossible during the period in which the order remains in effect. Additionally, in his March 12, 2020 executive order related to COVID-19, Governor Newsom included the following language: “State and local public health officials may, as they deem necessary in the interest of public health, issue guidance limiting or recommending limitations upon attendance at public assemblies, conferences, or other mass events, which could cause the cancellation of such gatherings through no fault of responsibility of the parties involved, thereby constituting a force majeure.” This language provides authority for the proposition that in California, cancelling an event in response to orders from state authorities related to COVID-19 should be treated as a force majeure, and the party who cancels a contract related to the event should not be found liable if the other party tries to sue them later for damages. 

Governor Newsom’s “stay at home” order for Californians is currently effective “until further notice.” What should you do if you have an event scheduled more than one month in the future, since there is no certainty as to whether the order will still be in effect by that point? It might be beneficial to reach out to event venues and vendors to provide notice that you believe current state and federal government directives concerning COVID-19 constitute a force majeure. If the other party agrees that a force majeure has occurred, you will then have documentation agreeing to a cancellation of the contract without liability. Even if the other party is not willing to agree that force majeure applies at this point, you will not lose the right to invoke force majeure later if bans on social gatherings remain in effect when the date of your event draws closer.

Additionally, some hotels, event venues, and vendors may be ceasing normal operations in response to Governor Newsom’s “stay at home” order. Thus, it is possible they will contact you to cancel a contract by invoking force majeure before you contact them.  

 

Can I still cancel a contract without liability, even if it does not include a “Force Majeure” provision?

 

California law includes several “statutory force majeure” provisions that apply to all contracts. These provisions, found in the California Civil Code (Sections 1441, 1511, and 1596), excuse a party’s performance under a contract when performance becomes impossible. If an event contract does not include a force majeure provision, companies and associations can try to invoke statutory force majeure in situations where performance of the event agreement truly becomes illegal or impossible (such as during periods when social gatherings are banned). 

 

Are there other options?

 

Yes.  Another option is to try to negotiate a cancellation or postponement of the event contract with the other party. Everyone understands the difficulties being faced by event planners who are scrambling to respond to the COVD-19 pandemic, so the other party may be more willing to make concessions in order to foster goodwill and incentivize future bookings. 

 

Other than “Force Majeure,” are there any other ways to cancel an event contract?

 

Many event contracts allow a party to cancel without cause – but there is usually a cost. The contract may include a “liquidated damages” provision which sets forth the exact amount that you will be required to pay when you cancel. Event cancellation insurance or other types of insurance may cover liquidated damages resulting from having to cancel an event due to a viral pandemic. You may wish to check with your insurance broker and/or carrier. Similarly, for important and high value contracts, you may wish to consult with an attorney.

 

What should be included in “Force Majeure” contract provisions going forward?

 

Event venues and vendors are generally resistant to negotiating force majeure provisions with customers. However, to the extent that an association or company is able to negotiate a force majeure provision, there are several terms that it should seek to include. Below is a suggested force majeure provision, along with an explanation for why certain terms are included:

 

“Neither party shall be deemed in default, and either party shall have the right to cancel this Agreement with a full refund of any fees previously paid and without liability upon written notice to the other party, if its performance or obligations hereunder are delayed or become impossible, inadvisable, or commercially impractical by reason of any act of God, war, fire, earthquake, labor dispute, accident, civil commotion, epidemic, act of government or government agency or officers, or any other unforeseeable circumstance beyond the control of the parties which the affected party cannot avoid even by using its best efforts (“Force Majeure Event(s)”).  In the event any other provision of this Agreement states that a fee is non-refundable, this section of the Agreement shall override that provision and shall take precedence. Additionally, if a Force Majeure Event causes a party to be unable to fulfill its performance obligations under this Agreement, the party impacted by the Force Majeure Event shall be excused from meeting its full performance obligations provided that the impacted party has taken commercially reasonable efforts to mitigate the underperformance.”

 

  • Make sure to carefully review the list of force majeure events. Courts tend to interpret force majeure clauses narrowly; in other words, only the events listed and events similar to those listed will be covered. One solution, included in the sample provision above, is to add catch-all language such as “other unforeseeable circumstances beyond the control of the parties which the affected party cannot avoid even by using its best efforts.”

  • “Impossibility” and “impracticability” to perform an obligation due to an unexpected circumstance are very high standards, but one or both terms are often found in boilerplate force majeure clauses. For greater flexibility, consider excusing performance when it would be “inadvisable” or “commercially impracticable” to perform (as in the sample provision above).

  • The last sentence of the sample provision excuses underperformance due to a Force Majeure Event. Although a force majeure clause should always allow for full cancellation without penalty, cancellation may not always be the association’s or company’s preferred course of action. There may be circumstances in which going ahead with the contract is preferred, despite the Force Majeure Event resulting in lower-than-expected attendance for an event.

 

The information contained herein is believed accurate as of March 20, 2020. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney. 

 

Copyright© 2020 CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.). This material may not be used or reproduced for commercial purposes. Other reproduction or use is strictly prohibited without the express written permission of the C.A.R Legal Department. All rights reserved.

2020 Copyright © CALIFORNIA ASSOCIATION OF REALTORS®. All Rights Reserved.  |  Terms & Conditions

CARlogo_Box_White.png