As part of the XPRIZE legal team, it’s my job to scrutinize the nuances of a variety of contractual obligations to protect XPRIZE and all of our prize teams working to solve grand challenges. For the first time during my many years at XPRIZE, I, along with the rest of the legal world, am now looking at one specific clause in an entirely new way.
The COVID-19 pandemic has crippled the ability of businesses around the world to maintain normal business operations. In the blink of an eye, governments have imposed unprecedented travel restrictions, closed schools, restaurants, nonessential businesses, and canceled events out of contagion fears. I have been particularly interested in how the accelerated nature of this pandemic affects the legal world. In particular, this is likely to have created new challenges that can significantly affect a party’s ability to fulfill contractual obligations, meaning contract disputes will likely extend well into the end of the decade.
Savvy contract negotiators always include a force majeure or "superior force", also known as an “Act of God” clause, that excuses a party’s non-performance in certain circumstances. Black's Law Dictionary defines force majeure as an event or effect that can be neither anticipated nor controlled by the parties. A deadly pandemic certainly seems like it would be considered an act of God. However, these clauses use broad language and therefore are subject to interpretation. Prior to this pandemic, I had never seen a contract that specifically contained the word “pandemic” in its force majeure clause. Just three short months ago most people wouldn’t have predicted that COVID-19 would bring the global economy to a near halt, but in light of our new normal, this is an opportunity for us to become more diligent as these clauses will gain much more attention and scrutiny.
On March 11, 2020, the World Health Organization (“WHO”) officially classified COVID-19 as a “pandemic” acknowledging what had seemed clear for some time — that the virus would likely spread to countries around the globe. A force majeure clause that expressly includes a reference to “pandemics” would be a viable defense for a party’s non-performance, but only if such an event was an “unforeseeable” risk at the time of the contract’s execution.
When the first cases were evident in Wuhan China back in December, lawyers could have anticipated that there would be a global ripple effect with the potential to wreak havoc on the economy. Unfortunately, that was considered a foreseeable event. Even if a contract had been revised to include a pandemic reference, it would have been too late to guarantee protection and prevail under that defense. Courts tend to view these clauses very narrowly and the enforceability of force majeure hinges on how explicitly the terms are defined such as “epidemic,” “pandemic,” “government orders,” “quarantine,” or even “state of emergency.” The best way to protect yourself is to specifically account for this during the drafting stages of the contract.
Our work at XPRIZE aims to make the impossible possible, so in some ways we could imagine any potential outcome as foreseeable, however the courts don't see it that way. So as we continue to navigate these uncharted waters and work towards solutions through the XPRIZE Pandemic Alliance, we should look at our legal agreements through a different lens in the event of a future health crisis such as the one we are now experiencing. What was once a standard and broadly interpreted “Act of God” reference will likely now be more detailed and specific in nature, and as such, will be further scrutinized by the courts.
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