Can COVID-19 Be Defined as a Natural Disaster? Is COVID-19 a Force Majeure Event?

Apart from those infected with COVID-19, owners of small and medium-sized businesses, and even owners of companies both small and large, found themselves overnight in a different and complex reality — not because of concern for their health, but mainly because of the economic distress into which they were thrust. That business sector, part of which had conducted itself carefully, prudently and responsibly, understands that it is now in an endless spiral, and the trouble is not yet over. On the one hand, the compensation the state provides is insufficient to cover the enormous harm; on the other hand, at this time the state does not permit the event to be defined in a legal manner that would allow contractual relief by virtue of force majeure.

So if you too have signed contracts (event hall, trade agreement, product supply, etc.) and do not know whether a contract can be canceled, whether the cancellation will expose you to a future lawsuit, and what steps you should take, you are welcome to review the article and the recommendations, and to contact our firm for individual advice.

So What Is Force Majeure?

Force majeure, by its foreign name Force Majeure, comes directly from French civil law and usually appears in commercial contracts.

It is a contractual provision agreed upon between the parties, included within the engagement agreement, whose purpose is to minimize the degree of liability of a party to the agreement who was unable to perform his part because of events that occurred beyond the control of one of the parties, or even both parties together.

Which Events Fall Under the Definition of Force Majeure?

It is important to note that there is no clear rule of thumb from which one can determine whether a particular event is force majeure or not. We can draw on past court rulings in order to try to make an analogy to the present case, but this is not a settled fact, since each case is examined on its own merits. In such cases, the court examines the legal issue by means of an objective test to assess the event and the circumstances that preceded it, without any need to hear the position of the parties to the contract.

Which Cases Are Included as Force Majeure?

Cases of force majeure usually relate to cases in which there is an inability to perform the contract. For example, states of war or situations close to it (military operations), natural disasters, an unforeseen strike, government decisions, etc. These are usually cases in which the parties to the contract did not foresee that event in advance — which makes the performance of the contract impossible or fundamentally different from what was agreed, and the agreement cannot be performed.

Since the outbreak of the COVID-19 pandemic occurred unexpectedly, parties to commercial contracts may invoke the defense of force majeure in order to justify a delay in or non-performance of the contract. Therefore, the term force majeure has become one of the most common concepts of our day, and every party to a contract — whether the tenants of event halls, offices, or preschools — is grappling with the question of what is the correct way to act on the contractual level.

Is a Pandemic Considered Force Majeure?

If we look back at history, we can see that pandemics appear frequently, and despite the SARS pandemic that appeared in 2002 (8,096 people infected and 774 dead) or the Ebola epidemic that broke out in 2014 (10,000 people infected and 4,951 dead), it was certainly to be expected that parties to a contract would include reference to pandemic events.

In light of past cases, and as an accepted practice, our firm makes a practice of drafting commercial contracts for many businesses and including reference to cases of lack of control, in order to quantify and minimize the risk — but there is no doubt that this event exceeds them in its intensity and includes emergency orders and regulations that the economy has not known for many years.

In light of the inconceivable numbers of people who died or were infected, we believe there will be no escaping the declaration of the COVID-19 pandemic as force majeure.

Which Statutory Provisions Were Issued by the Government?

The Director General of the Ministry of Health issued the Public Health Order (Novel Coronavirus 2019) (Instructions for an Employer of an Employee in Home Isolation) (Temporary Order), 5780-2020; the Public Health Order (Novel Coronavirus 2019) (Home Isolation) (Temporary Order), 5780-2020; the Public Health Order (Novel Coronavirus 2019) (Hospital Isolation) (Temporary Order), 5780-2020 — statutory provisions that indicate the government’s frame of mind in handling and coping with the COVID-19 pandemic, which will most likely influence the decision to determine that this constitutes force majeure, and any party that stipulated that government decisions would be defined as force majeure is now on the safe side.

How Is Force Majeure Defined in a Contract?

In order to answer this question, one must read the contract concluded between the parties, and at times we will also seek to review the circumstances that preceded the conclusion of the contract, in order to learn of the parties’ frame of mind prior to signing.

There are contracts that were drafted in a general manner in which the use of force majeure is not expressed specifically,

that is, the parties defined which events would be included under force majeure and would not impair the performance of the contract and/or would grant protection in the event of its non-performance. For example, if a contract includes a provision that a pandemic constitutes force majeure, then the coronavirus, which was declared a pandemic by the World Health Organization, quite clearly clarifies the meaning of the agreement — since there was agreement even before the pandemic broke out.

What Are the Implications of Declaring the Coronavirus as Force Majeure?

If there is a permanent impossibility of performance under the agreement, the agreement may be canceled retroactively, that is, the parties are returned to the point in time at which they were prior to signing.

If it is impossible to perform in the future, the agreement may terminate without any need to perform it.

If there is a partial impossibility of performance, the scope of the agreement may be reduced accordingly.

Is Liability Imposed on a Party Claiming Force Majeure?

The burden of proof for the claim that this is force majeure rests on the party seeking to benefit from this defense, and a party claiming an inability to perform its obligations under the agreement must make every reasonable effort to avoid breaching the contract. These efforts may tip the scales and indicate the degree of good faith in the performance of the contract.

So What Is Happening in the Real Estate Market?

The Accountant General at the Ministry of Finance recently hastened to declare that the COVID-19 pandemic is not a force majeure event, and that contractors must meet their obligations to apartment buyers and will not be able to cling to clauses that allow them exceptional postponements. These clauses have very great economic significance, since every month of delay in the delivery of apartments without compensation, beyond the statutory framework, is worth a great deal of money to the contractors.

It is important to know that in the construction industry, contracts are usually defined so that a war event or an event defined as force majeure is one that allows the contractor to obtain an exemption from the contract’s requirements and to delay the delivery of the apartment.

Can COVID-19 Be Defined as a Natural Disaster? Is COVID-19 a Force Majeure Event?

We anticipate that after the return to routine, the courts will be flooded in the wake of the COVID-19 pandemic and will even earn the name “COVID lawsuits.”

The courts will have to decide whether the coronavirus can be defined as force majeure and as an event that was significantly exceptional and under which the agreement could not be performed. This decision has enormous economic implications, mainly for many contracts in the economy, insurance policies, agreements and regulations, and therefore we are likely to witness one of the most significant legal battles that will take place in Israel in the economic arena.

On a factual level, an event of paralysis of the business sector occurred in Israel that is comparable to the Yom Kippur War. Institutions, businesses and entities that operated both in 1973 and today claimed that the situation is similar to that war.

What Is the Significance of the Decision Not to Recognize the COVID-19 Pandemic as Force Majeure?

The significance is wide-ranging, and in the future highly exceptional events, on a nationwide scale, will hinge on these rulings.

A further matter is, in effect, the creation of a situation in which those clauses in contracts become meaningless; for if a very extreme and exceptional event occurs that does not give effect to the clause, then there is harm to the reliability of contracts and to the ability to rely on clauses that create protections in exceptional situations. Either way, the decision will most likely reach the doorstep of the Supreme Court, and the discussion of it will be thorough and incisive, since it has very great economic implications for both parties.

What Are the Practical Recommendations?

The agreement should be reviewed, with an emphasis on the provisions relating to force majeure, and it should be checked which events and expressions were included in these provisions.

Contact should be made with the parties related to the contract to negotiate with them and reach agreements as far as possible, in order to render a legal proceeding unnecessary for deciding the disputed issues — and a decision contrary to agreement is not necessarily the desirable outcome. We recommend exhausting this stage fully, and even seeking the assistance of suitable professionals.

The article was also published in the newspaper TheMarker on 19/4/2020.

The Amon Law Firm deals extensively with contract law, by advising clients who seek to receive legal assistance in the field. If you have questions, you are welcome to get in touch to check your legal standing.