Contracts Being Tested by COVID-19
Stites & Harbison Client Alert, March 18, 2020
As the country takes action to slow the spread of the COVID-19 coronavirus, sporting events, concerts, and business conferences are being cancelled at an astounding rate. Each day that passes since the outbreak brings new cancellations, government containment efforts, and complex legal questions. The initial visible impact in the United States has been predominantly to the hospitality and entertainment industries, with cancellations significantly affecting venues, attendees, hotels, and caterers; however, the impact of the coronavirus is sure to touch contractual agreements across all industries moving forward. How exactly will the coronavirus affect contracts? The answer: it’s complicated.
Read the contract!
Some businesses may be interested in their ability to delay or terminate certain obligations under a contract as a result of the coronavirus. Others may be on the alternate side, wondering what their remedies may be when a customer, vendor, or other party is attempting to delay or terminate a contract.
Determining what actions the parties may be entitled to begins with an analysis of whether the contract in question contains a “force majeure” provision. These boilerplate provisions are frequently included in commercial contracts, yet do not typically get much attention until times of disaster. “Force majeure” is an old French term meaning superior force. While there is no precise definition, force majeure generally refers to events which are outside the expectation or control of the parties that prevent a party from performing the contract.
Force majeure provisions vary widely. Some contain broad language defining force majeure as an unforeseen event outside of a party’s control or an act of God, while others reference specific events, such as disease, war, or hurricanes. One particular circumstance that is rarely included in the definition of a force majeure event is general economic decline. Depending on the language in the contract, delays or terminations due to the coronavirus or related government action (such as a travel or congregation ban) may be covered. As more people and businesses are impacted by the coronavirus, the breadth of situations covered by force majeure clauses will be tested, including the impact of labor and supply shortages. Beyond determining whether a specific event falls within the definition of force majeure in question, further analysis will be required to determine whether the event’s impact rises to the level contemplated by the contract. Some contracts may require the force majeure event to render performance of the contract impossible, while others may only require the event to render performance commercially impracticable.
Whether or not a contract contains a force majeure provision, the contract may provide delay or termination rights allowing relief for the parties. For example, some contracts may contain a termination for convenience clause, giving one or both parties the option to terminate the contract for any reason or no reason effective upon a certain timeframe after notice is given. Other contracts may be nearing the end of their term, providing the parties the opportunity to renegotiate or elect not to renew the contract. Like the wide variety of force majeure provisions, the availability of other delay or termination rights will differ greatly from contract to contract so a thorough analysis of the contract in question is required.
If there is a force majeure provision, is all performance excused?
The extent to which a party is excused from performance, if at all, depends on the language in the specific contract. Some force majeure provisions allow for complete nonperformance, but others only allow reasonable delay of performance and impose a duty on the impacted party to make reasonable efforts to perform eventually. Further, certain contracts may require analysis of performance through the date of the invocation of force majeure. In a situation in which payments are due periodically, for example, the specific language of the contract would likely dictate whether payments due up until the point force majeure was invoked would be owed and payable or excused and/or refunded.
Are there other requirements?
Many force majeure provisions require written notice, sometimes within a specific timeframe of the event that triggered the invocation of the provision. Some force majeure clauses impose an obligation on the impacted party to mitigate the effects of the force majeure event. Depending on the specifics contained in the contract, partial performance by one or both sides prior to the invocation of the force majeure clause may also need to be addressed.
What if there is no contractual provision?
Without a force majeure clause, courts typically will begin analysis by determining whether or not the event causing delay or termination of the contract was foreseeable. If the contract in question involves the sale of goods, it may be covered by the Uniform Commercial Code. The UCC has a provision that may excuse performance where it has become commercially impracticable. A party impacted by a particular event may be able to invoke common law excuses for nonperformance, such as impossibility, impracticability, and frustration of purpose. These common law arguments typically require the impacted party to prove that such party’s performance is not just more expensive or challenging than expected, but, depending on the doctrine relied upon, is either no longer possible or is so inherently different in nature than what was originally expected that it contravenes the basic assumption of the parties’ underlying agreement.
Regardless of whether or not a force majeure clause exists in a contract, the parties will need to review their relevant insurance policies, including business interruption or event insurance policies, to determine if insurance coverage may be available to them.
This pandemic is going to have widespread effect across all industries. Whether or not the coronavirus may be considered a force majeure event is a moving target because of the ever-changing nature of the information available about and response to the disease. Although the initial analysis of the effect of the coronavirus on a particular contract may begin with legal analysis, businesses will likely have to balance their potential legal remedies with the impact to their business relationships due to the uncertainty of the situation and the broad impact of the pandemic. The best course of action in some situations may be for the parties to sit down and negotiate a modified arrangement, even if only on a temporary basis, rather than fully terminate the agreement. Observers have commented that this will likely be the worst epidemic since the Spanish Flu pandemic of 1918. The law books are full of cases from that time regarding contracts that were broken as a result of the flu. We can expect a similar result from the coronavirus, although now the cases will all be stored in the cloud.