Impact of COVID-19 and Ohio’s Order Prohibiting Mass Gatherings on Force Majeure Provisions and Insurance Coverage

03.12.2020

Today, in response to the continued spread of COVID-19 (coronavirus) in Ohio, Amy Acton, Director of the Ohio Department of Public Health issued Director's Order prohibiting mass gatherings of 100 people or more, including at auditoriums, stadiums, arenas, large conference rooms, meeting halls, cafeterias, or any other confined indoor or outdoor space. The Director's Order does not apply to a variety of ordinary business operations, such as bus and train stations, airports, medical facilities, shopping malls, or places in which it’s unusual for people to be within an arm’s length of each other, such as office buildings, schools, restaurants, factories, retail and grocery stores. The Director's Order also does not apply to religious gatherings, gatherings for the purpose of exercising First Amendment protected speech, or weddings and funerals. This is in addition to previously issued orders by federal, state and local officials declaring public health or states of emergency.[1]

Although everyone’s first priority is to protect the health and safety of the public and vulnerable populations in particular, the economic and legal considerations of COVID-19 need to be considered as well.  The Director's Order has important legal implications for companies and citizens in Ohio.  KMK is advising clients on numerous legal issues related to COVID-19 and its effects.  This post will highlight two issues that should be on every company’s radar which may be affected by the Director’s Order: the invocation and enforceability of force majeure provisions in contracts and coverage under insurance policies. KMK’s Employment Group has previously published employer guidance for responding to the COVID-19 threat. 

Force Majeure Provisions in Contracts
A force majeure provision has become a common “boilerplate” provision in commercial contracts that generally excuses a party’s performance of all or certain contractual obligations when circumstances beyond their control arise making performance inadvisable, commercially impracticable, illegal, or impossible.  All companies should be reviewing their key commercial contracts to determine whether they have a force majeure provision.  If a contract has a force majeure provision, companies should ask:

  • Does a force majeure event specifically include quarantines, pandemics, public health emergencies or disease?
  • Does a force majeure event specifically include civil orders or orders from a governmental authority?
  • Is the list of force majeure events exclusive or non-exclusive?
  • Does a force majeure event specifically include any other event beyond the reasonable control of the parties or events that could not be reasonably expected to occur?
  • Does the force majeure provision have a time limit for how long it may excuse performance before a party can declare a breach?
  • Does the force majeure provision require that a party be wholly or partially unable to carry out its obligations?
  • Finally, does the force majeure provision specifically include or exclude payment obligations from contractual obligations that may be excused because of a force majeure event?

The specific language of the force majeure provision has important implications under both Ohio and New York law.

Ohio Law
Ohio law interpreting force majeure clauses is sparse, but a few principles are clear.  First, under Ohio law, a party seeking to invoke a force majeure clause must prove that the event was beyond the party’s control and without its fault or negligence.  In addition, force majeure provisions may not be invoked merely because performance may prove difficult, burdensome, or economically disadvantageous.  See Stand Energy Corp. v. Cinergy Servs., 760 N.E.2d 453 (Ohio Ct. App. 2001)

Ohio courts recognize that force majeure provisions have some overlap with common law defenses of impossibility and impracticability, but look to the language of the clause to determine its applicability.  When a force majeure clause is broadly written to include any event “not reasonably within the control” of a party, Ohio courts will give effect to such language without requiring the specific event to be described.  See Haverhill Glen, LLC v. Eric Petroleum Corp., 67 N.E.3d 845, (Ohio Ct. App 2016).  When specific events of force majeure are enumerated, courts will evaluate whether the event in question is similar to the enumerated events.  See Dunaj v. Glassmeyer, 61 Ohio Misc. 2d 493 (Ohio Ct. Com. Pl. 1990).

New York Law
New York courts generally interpret and apply force majeure provisions in contracts according to their terms.  Without a specific force majeure provision, New York courts will generally not permit a force majeure defense to an integrated contract.

New York courts construe force majeure clauses narrowly.  If the clause includes an exclusive list of qualifying events, the event in question must fall within the scope of a listed item.  On the other hand, if the clause includes a non-exclusive list, the event in question must either be included on the list or be of the same kind or nature as the expressly listed events, even if there is a catchall phrase at the end of the non-exclusive list, such as “other events beyond the reasonable control of the parties.”

Doctrine of Impossibility
All is not lost without a specific force majeure provision.  Both New York and Ohio law recognize the common law doctrine of impossibility of performance, which may excuse non-performance in the absence of a contractual force majeure provision.  Ohio and New York law generally require performance to be “impossible” rather than “impracticable” as adopted by the Restatement of Contracts.  The doctrine excuses performance under a contract because it has been rendered impossible to perform due to the occurrence of an unforeseeable event.  This doctrine is generally applied narrowly and will be more difficult to invoke than an express force majeure clause. However, the doctrine of impossibility may have particular relevance for events which are prohibited by the Director's Order.   

Analysis
Analysis of whether a specific contract’s force majeure provision may be invoked is a contract specific and fact-dependent inquiry, but the Director's Order likely will make it easier for companies to invoke force majeure clauses that specifically include civil orders as a force majeure event rather than attempting to rely on an “events beyond the reasonable control of the parties” clause.  Although probably not necessary given the declarations of states of emergency at all levels of government, the Director's Order provides further support for invoking force majeure provisions that specifically include quarantines, pandemics, public health emergencies or disease.   

It is important to note that some force majeure provisions specifically exclude payment obligations from the contractual obligations that may be excused from a force majeure event.  This means that although a party to a contract may be excused from its obligations to deliver goods or provide services, the counterparty may still be required to make the payments required by the contract.  Some force majeure provisions also impose time limits on how long they may excuse performance.  In those cases, companies should be strategic about when they deliver a force majeure notice.   Finally, even without a specific time limit, force majeure provisions are almost always temporary, and performance is excused only for so long as the specific force majeure event is in effect. 

We expect that there will be disputes over when the COVID-19 force majeure event has ceased and the parties can resume contractual performance, perhaps even more than disputes about whether the COVID-19 outbreak has triggered force majeure clauses generally.

Contact Nick Simon, Rob Lesan, or Ross Bextermueller or any other member of the KMK Business Group for specific questions related to COVID-19’s impact on your contractual obligations.

Insurance
Companies should review their insurance and understand whether they carry coverages that may potentially respond to loss resulting from COVID-19 and government response to it.

Business interruption coverage is often a part of commercial property insurance. It typically requires a direct physical loss to property that results in temporary suspension of business activities.  Sometimes the policy may require that a loss is designated, while in other policies there is no such requirement.  Although it is uncertain whether COVID-19 can result in the type of direct physical loss contemplated by a property policy, it is possible that a workplace contamination due to a COVID-19 outbreak, or a contamination with a key supplier that suffers a shutdown due to COVID-19, could present insurance issues to explore.

Another potential source of coverage, also possible to be found within a property insurance policy, relates to coverages triggered by the actions of a civil or military authority.  The Director’s Order may result in a company’s access to its property being impaired in a manner that could provide a potential for recovery. Each insurance policy contains different language that can affect both the business interruption and civil order coverage, and must be carefully considered in order to analyze potential applicability.

Contact Tony Verticchio with questions regarding specific insurance coverage issues related to COVID-19.

[1] On January 31, 2020, Health and Human Services Secretary Alex M. Azar II declared a public health emergency.  On March 9, 2020 Ohio Governor Mike DeWine signed Executive Order 2020-01D, declaring a state of emergency in Ohio. On March 11, 2020, Cincinnati Mayor John Cranley declared a state of emergency in Cincinnati, Ohio.  On March 12, 2020, the Hamilton County Board of County Commissions declared a state of emergency in Hamilton County, Ohio. 

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