Event Cancellations: What You Need to Know

As the Covid-19 pandemic is upending life as we know it, nonprofits are especially vulnerable: Groups must simultaneously adjust to a host of changes while also preparing to support their constituencies, many of whom need more help because of the pandemic.

An immediate challenge many nonprofits face is whether to cancel events such as conventions, conferences, fundraisers, and meetings. Will a nonprofit owe crippling cancellation fees to a venue and to vendors if it cancels? Does the timing of the cancellation matter?

Canceling an event on short notice triggers cancellation fees, unless the force-majeure clause in a nonprofit’s contracts applies to excuse such action, or in legal terms, to excuse performance of duties under the contract. (Event-cancellation insurance may also apply to reduce the financial liability.) However, determining whether and when a force-majeure clause will apply is not always clear.

What Is a Force-Majeure Clause?

A force-majeure clause (French for “superior force”) is a contract provision that relieves the parties from performing their contractual obligations when certain circumstances beyond their control arise. Ideally, all contracts made in connection with an event will include a force-majeure, or sometimes called an impossibility, clause. Typically, the provisions allow for complete cancellation of a meeting without penalty. But this isn’t always true. Some clauses require a full refund of prepaid fees, but others forgive only future payments or a prorated amount of the total fees depending upon the time of the force-majeure event.

Without a force-majeure clause, parties to a contract are left to the mercy of the narrow common-law contract doctrines of “impracticability” and “frustration of purpose,” which rarely result in an excuse of performance.

A well-drafted force-majeure clause contains five main elements. More details on each follow this list.

• Catchall clause: expanding the list of events that qualify.

• Standard of performance: details conditions under which performance is excused, such as impossible/illegal/impracticable (extremely burdensome).

• Remedy: states whether refund is full or partial.

• Notification provision: rules for invoking the clause.

Knowing how to read and interpret each of these elements may save a nonprofit from cancellation fees or activate an event insurance policy or do both.

The List and the CatchAll: What Counts as a Force Majeure?

Every force-majeure clause has a list of events that will allow one of the contract parties to invoke the protections of the clause. The list may be general — “acts of God or government authorities, natural disasters, or other emergencies” — or very detailed in an attempt to cover every potential catastrophe. Provisions typically cover natural disasters such as hurricanes, floods, earthquakes, and weather disturbances (sometimes referred to as “acts of God”) and regional risks such as an avalanche or a tsunami. Other covered events may include war, terrorism or threats of terrorism, government regulations, civil disorder, labor strikes or disruptions, fire, and curtailment of transportation facilities preventing or delaying attendance by at least 25 percent of meeting participants. Public-health threats recognized by external bodies, like the Centers for Disease Control and Prevention or the World Health Organization, or general phrases regarding medical epidemics are sometimes included explicitly.

Unless it’s clearly covered in the list, the crucial question is whether the Covid-19 pandemic is a force-majeure event. Courts tend to interpret force-majeure clauses narrowly; that is, only the events listed and events very similar to those listed will be covered. When trying to invoke a force-majeure clause, the likelihood of success increases the closer the circumstance is to an articulated event in the clause. For example, while acts of terrorism might be a specified force-majeure event, it does not necessarily follow that a court would also excuse a party’s performance based on “threats” of terrorism.

Recognizing that not all potential events can be anticipated, a force-majeure clause may include language to expand the application of the clause beyond the listed events with phrases like “including, but not limited to” before the list or “other events beyond the control of the parties” at the end of the list or use both. However, these catchall phrases are still interpreted stringently by courts and may even narrow the circumstances for listed events. For example:

• “…or any other emergency beyond the parties’ control,” at the end of a list of specified force-majeure events serves to narrow the scope of triggering events only to “emergencies.” With such language, non-emergency circumstances making it inadvisable to hold an event would not be covered.

• “…or other unforeseen events,” referenced in a catchall phrase raises the question of whether the potential force-majeure event would qualify as unforeseen. In the context of the Covid-19 pandemic, do the previous global outbreaks of H1N1 and SARS render this pandemic foreseeable? The answer may depend upon the time of execution of the contract and whether any other medical events were included in the list.

• ”…other events beyond the control of the parties” is broader than “any other similar event beyond the parties’ reasonable control” because the latter limits the potential events to those similar to those listed and requires that the events be outside the parties’ reasonable control.

Interpretation of force-majeure clauses is ultimately a function of the courts, but litigation is expensive. The closer an event is to one listed, the more likely that the clause will apply without a dispute. Context and timing also matter. The ability to successfully invoke a force-majeure clause might increase or decrease as circumstances evolve.

Standard of Performance: When Does a Force-Majeure Event Prevent Performance Under the Contract?

The classic standard for force majeure to apply is when it is “impossible” to perform under the contract. Impossibility is a high threshold; many circumstances will make holding an event inadvisable even though it would still be possible to do so. More flexible clauses excuse performance when it would be “inadvisable, commercially impracticable, illegal, or impossible” to perform. There also may be participation thresholds for performance, such as “events that prevent or unreasonably delay at least 25 percent of event attendees and guests from participating or attending,” which effectively adjust the standard of performance. The party invoking a force-majeure clause must be able to show that performance of the contract is prevented to the relevant standard.

Notification: When and How to Notify?

Some force-majeure clauses specify how and when they may be invoked, providing a short window of time between the force-majeure event and required notification to the other party. For events that are unfolding over a period, like the spread of a medical epidemic, determining when to invoke the force-majeure clause is paramount. From a contract perspective, it is helpful to wait until the circumstances fall clearly within one of the articulated force-majeure events. However, there may be other practical reasons for a nonprofit to cancel its event before the force-majeure clause would clearly apply. The Covid-19 pandemic, with its rapid escalation of government regulations in parallel to the proliferation of the virus, has introduced this dilemma for many nonprofits. Maximizing the likelihood that a force-majeure clause could apply may require an uncomfortable wait for nonprofits with upcoming events.

What About Event Insurance?

Amid all this uncertainty, many are wondering whether the costs of (and losses resulting from) canceling an event are covered by insurance. Does Covid-19’s designation as a pandemic by the World Health Organization, the various governmental orders restricting movement and events, or state-of-emergency declarations affect the scope of insurance coverage?

The answers to these questions depend on the terms of the policy. Those seeking to recoup the costs of canceling an event should look first to their event-cancellation insurance policy, if they have one, as it is most likely to provide such coverage. However, many of these policies exclude coverage for uncommon and catastrophic events. For example, virtually all such policies have coverage exclusions for losses that are caused by acts of war, and some may also exclude terrorist attacks. Many event-cancellation policies also exclude coverage for communicable diseases. As with venue and vendor contracts, the question is whether the communicable-disease exclusion applies to the Covid-19 pandemic. If it does, did the policyholder pay extra to purchase a coverage “extension” that will cover losses from communicable diseases, even if their base coverage will not?

For insurance policies, the “pandemic” designation by WHO is particularly important. Many event-cancellation policies use WHO’s declaration as a trigger for their communicable-disease exclusion. For example, some policies contain language similar to the following:

Again, timing matters when determining if the communicable disease exclusion applies. Nonprofits with similar language in their policies who cancel events now may have a weaker claim for coverage than those who canceled an event prior to WHO’s declaration that Covid-19 was a pandemic. Conversely, the declaration may counterbalance whether the force-majeure clause applies in other event contracts.

The coronavirus outbreak has placed a tremendous amount of pressure on insurers, who now face many large claims at once. As a result, insurers may take an aggressive negotiating posture for those claims that are not clearly covered under the terms of their policies. In this context, nonprofits should be informed about their options and their best arguments for coverage before engaging in a claims process.

Help in Uncertain Times

The financial impact of the Covid-19 outbreak is still unknown, but it is being felt in every sector of the economy. As nonprofits contemplate their financial exposure in connection with canceled events, an understanding of the force-majeure clauses and their potential event-insurance coverage should provide some helpful guidance in making these difficult decisions.

Anne K. Gerson is a counsel in Venable LLP’s Nonprofit Organizations Practice. This article was written with assistance from Janice M. Ryan, George E. Constantine, Michael C. Davis, and Edmund M. O’Toole.