Is it possible to protect your company from extreme events out of your control like COVID-19? If your contracts and agreements have a force majeure clause it may be possible.
For the purpose of illustration, let’s use the example of a private school operating in New York during the pandemic. Private schools offer amenities and facilities above and beyond those of a public school. When the government closed schools and suspended in-person learning, private school students lost access to the facilities included in their tuition. Due to the reduction of available services, some parents refused to pay their child’s full tuition. Can a school protect itself from this type of unprecedented situation?
To protect from these types of scenarios tuition agreements must include a force majeure clause. A force majeure clause outlines the consequences of non-performance due to unforeseen extreme events beyond the control of the impacted party. The purpose of the clause is to provide protection for non-performance due to unforeseen events. Examples of extreme events include war; extreme weather disasters such as hurricanes, earthquakes, or tsunamis; or a labor shutdown due to a strike. These events result in major disruption to business activities that make it impossible for the parties to partially or fully perform under their contracts.
Force majeure clauses protect parties from unforeseeable events, which also means the parties usually don’t describe such events in the clause. However, New York courts focus very critically on the language of the force majeure clause when determining whether to excuse the nonperformance of a contract. According to New York precedent, generally, the only events that will excuse nonperformance are those specifically listed.
Obviously, due to the unforeseeable nature of the pandemic, most force majeure clauses won’t explicitly list COVID-19. However, some companies may have listed “pandemic” as a qualifying force majeure event. The New York courts are currently in the midst of litigation in determining whether to excuse COVID-19 as an excusable event in the context of a force majeure clause. The courts are still determining whether Covid-19 is a covered exception even in cases where the word “pandemic” is included in the clause.
Going back to our fact pattern, a tuition agreement from September 2019 would need to have had a force majeure clause that includes a pandemic as a possible extreme event. The absence of such a clause precludes a party from asserting the pandemic as a defense. However, as stated above, even if the contract referenced a pandemic in its force majeure clause, the courts have not decided when that covers nonperformance due to COVID-19.
Due to Covid-19, many companies now incorporate force majeure clauses specifically referencing pandemics that result in either quarantine or home confinement to protect themselves from nonperformance.
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