Employers and public agencies utilize contracts in many ways with a variety of parties. In addition to employment contracts and collective bargaining agreements, many employers also enter into contracts with third-party vendors to provide specialized services. Unfortunately, many existing contracts failed to contemplate pandemic events such as COVID-19, which has left many employers with uncertainty regarding payment and performance obligations during state-wide closures. The present situation provides an opportunity to review contracts and to consider incorporating certain protections into future agreements.
The most commonly discussed contract clause during the COVID-19 pandemic has been the force majeure clause. Typically, this clause relieves parties from their contractual obligations if an unforeseeable and uncontrollable event occurs. These events are sometimes referred to as “acts of God.” However, simply inserting a general force majeure clause into a contract will not be enough to protect an employer against a pandemic such as COVID-19. Rather, New York courts have held that a force majeure clause must include the specific event that is claimed to have prevented performance [Phibro Energy, Inc. v. Empresa de Polimeros de Sines Sarl, 720 F. Supp. 312, 318 (S.D.N.Y. 1989)]. In addition, New York courts have limited catchall provisions in force majeure clauses. In a decades-old decision, the Appellate Division, First Department applied the principle of ejusdem generis to catchall language in a force majeure clause, stating that “where certain things are enumerated, and such enumeration is followed or coupled with a general description, such general description is commonly understood to cover only things [of the same kind or nature] with the particular things mentioned” [Krulewitch v. National Importing & Trading Co., 195 A.D. 544, 546 (1st Dep’t 1921)]. Thus, a force majeure clause in New York must specifically list events such as epidemics, pandemics, serious diseases, and quarantines to adequately protect against a situation like COVID-19.
A well-drafted force majeure clause should have language to account for acts of government or measures of governmental authority. This will be particularly relevant where a pandemic event results in a shutdown At the state or local level, or the Governor or a Mayor issues an Executive Order that affects the terms of an agreement.
There are other useful unforeseen events that employers should consider incorporating into a force majeure clause. If an employer has concerns about a potential lack of communication, a force majeure clause can be written to require affected parties to provide notice to one another. Alternatively, an employer may wish to insert language requiring a party to mitigate the effect of a force majeure event to the greatest extent practicable, to limit the potential hardship of a future catastrophe. Employers should be aware that the mere existence of a qualifying event in a force majeure clause will not be enough to relieve the parties of their obligations. The United States Supreme Court has held that the event must not only be specifically listed, but must also be unforeseeable [United States v. Brooks-Callaway Co., 318 U.S. 120, 122-123 (1943)]. In other words, if an event is foreseeable and the parties can adequately prepare themselves in advance, a force majeure clause will not be triggered.
While force majeure clauses are one of the most important protective measures for employers to implement, other protections should also be considered. One of the lessons that COVID-19 has taught us is that there may be unanticipated costs related to the response effort of a pandemic. Additionally, governmental action and Executive Orders may contain language which would require employers to violate the terms of existing agreements. There are creative measures which employers can take to address these issues in future agreements. For instance, compliance clauses may provide that the terms of an agreement will be superseded by conflicting laws, including Executive Orders. Furthermore, contracts may include language that places the burden of paying for any necessary unanticipated equipment (i.e., protective masks or gloves) on the other party.
COVID-19 has been an unprecedented situation to navigate, but by anticipating potential issues and revising agreements accordingly, employers can rest assured they will be better prepared if another pandemic ever arises.