Skip to main content

Pandemic: The Externality your Contract Didn’t Quite Anticipate

Commercial contracts -particularly supply chain contracts – are usually bilateral, but they are nevertheless built on finely tuned financial, consumer, and material markets. Very few industry sectors are finely tuned in the wake of COVID-19. Delay and disruption of contracts is inevitable for wedding photographers and silicon wafer manufacturers alike. Parties looking to enforce or be relieved from contracts will first want to investigate any force majeure clauses they’ve executed.

Force Majeure: The Non-Money Money Clause You Can’t Even Pronounce.

In every contract, you’ll find a non-money money clause. What’s a non-money money clause? Typically, two parties will enter into the drafting of a contract after agreeing to several essential financial terms, e.g. I will buy X sheep from you for Y Dollars, you will ship them at your cost and risk, etc. Lawyers then step into to introduce layers of jargon that you, the money man / woman, rarely consider. These clauses do not exactly specify financials, but they carry the potential to financially impact your business much more than a head or two of sheep.

In nearly every set of non-money money clauses you’ll find a force majeure clause. To help understand the concept, just think “Force Majeure, Monsieur Pepe Le Pew!” That may give you the visual of an uninvited skunk contaminating everything in its sight, which is the essential nature of force majeure. When Pepe the skunk, in lawyer jargon an “act of God,” disrupts your ability to perform a contract, you may be excused from obligation depending upon how the force majeure is defined in the contract, subject to state law.

In Tennessee, judges are pretty hands-off when it comes to contracts, and typically defer to the written language of a contract between two sane entities. That being said, Tennessee does not exactly have a great deal of judicial precedent around global pandemics. Additionally, a pandemic is a bit different from the standard fare acts of God like earthquakes and hurricanes, since a lot of the fallout from a pandemic (as we are seeing now) is the result of human, error-prone decision making.

Here’s an example of a pretty straightforward force majeure clause:

“No delay, failure, or default, other than a failure to pay fees when due, will constitute a breach of this Agreement to the extent caused by acts of war, terrorism, hurricanes, earthquakes, other acts of God or of nature, strikes or other labor disputes, riots or other acts of civil disorder, embargoes, or other causes beyond the performing party’s reasonable control.”

David W. TollenThe Tech Contracts Handbook

Note that neither “epidemic” or “pandemic” is mentioned. Also note the phrase “beyond the party’s reasonable control.” If a force majeure clause is present in a contract that you are attempting to void, but one which the opposite party is trying to enforce, you may each have valid arguments to advance for your position. The enforcing party can say that other acts of God were specifically mentioned, and that the failure to mention “pandemic” was an obvious and intentional desire not to consider such event a force majeure; furthermore, that the opposite party was on sufficient notice in the information age to regard, and to act in this regard towards, the general possibility of pandemics and the specific potential of this COVID-19 pandemic. On the other hand, the excusing party can say that this is simply an “other act of God or nature” due to its extreme, destabilizing nature and the very fact that the virus pathogenically crossed over from nature to man.

Tennessee’s pandemic jurisprudence is not exactly rich, but a sampling of cases highlights key factors to address in negotiating or litigating your COVID-19 contractual dispute.

COVID-19 might be categorically akin to, and thus captured by, other acts of God or externalities listed in your force majeure clause, e.g. “communicable disease” or “epidemic”.

See Dog House Investments, LLC v. Teal Properties, Inc., 448 S.W.3d 905 (Tenn. Ct. App. 2014) (where flooding, though not explicitly named, was found to be an event anticipated by and thus covered by a fire protection reimbursement provision).

Full compliance with governmental regulations might not release your company from liability when your company activities are the necessary, but-for cause of injury.

See Zollinger v. Carter, 837 S.W.2d 613 (Tenn. Ct. App. 1992) (where a developer was liable to nearby property owners for flooding even though the developer complied with all municipal codes and obtained all requisite architectural, engineering, and regulatory approvals.)

The nature of your business and its operations are factors to consider in light of how significantly acts of God release your liability to others.

See Hill v. St. Paul Fire & Marine Ins. Co., 512 S.W.2d 560 (Tenn. 1974) (where a tornado was an excusable act of God when it struck the employer’s building and killed an employee); Dixon v. Travelers Indem. Co., 336 S.W.3d 532 (Tenn. 2011) (where a tornado was not an excusable act of God when it struck the employer’s truck on a highway and killed an employee).

Realistically, each party will need to consider the other non-money money clauses like venue and arbitration to fully consider the strength of its respective position in a contract dispute around COVID-19.

Find out more in our free on-demand Zoom webinar.

REGISTER HERE

RESOURCES

In nearly every set of non-money money clauses you’ll find a force majeure clause. To help understand the concept, just think “Force Majeure, Monsieur Pepe Le Pew!” That may give you the visual of an uninvited skunk contaminating everything in its sight, which is the essential nature of force majeure. When Pepe the skunk, in lawyer jargon an “act of God,” disrupts your ability to perform a contract, you may be excused from obligation depending upon how the force majeure is defined in the contract, subject to state law.

Contact us for more information.

THIS IS NOT LEGAL ADVICE.

WE ARE NOT YOUR LAWYERS. NOTHING IN YOUR REVIEW OF THIS ARTICLE ESTABLISHES A LEGAL RELATIONSHIP BETWEEN ANY ONE OF US AND YOU. WE PROBABLY DON’T EVEN KNOW YOU, BUT WHO’S TO SAY WE CAN’T BE FRIENDS? NOTHING IN THIS ARTICLE IS WARRANTED TO BE ACCURATE IN ANY WAY, AND THOUGH PRACTICALLY UNLIKELY, IT IS POSSIBLE THAT THE SUBSTANCE OF THE ARTICLE CAN KILL, HARM, MAME, OR OTHERWISE DEFEAT YOU, PARTICULARLY IF YOU ARE READING IT WHILE ON A SCOOTER. YOU SHOULD NOT RELY ON ANYTHING IN THIS ARTICLE WITHOUT INDEPENDENTLY DISCUSSING IT WITH YOUR LAWYER. YOU PROBABLY SHOULD HAVE ALREADY BEEN IN TOUCH WITH A LAWYER BEFORE READING THIS ARTICLE. LAWYERS ARE A GOOD THING – ALSO NOT LEGAL ADVICE.

Close Menu

Historic James Building
735 Broad Street, STE 1001
Chattanooga, TN 37402

Nashville Entrepreneur Center
41 Peabody St.
Nashville, TN 37210
(For client and partnership meetings only)

The Yale Club
50 Vanderbilt Ave.
New York, NY 10017
(For client and partnership meetings only)

 

RVL® is a business, intellectual property, and technology firm, building today’s companies for tomorrow’s economy.