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Novel Coronavirus (COVID-19) Has Everyone Asking, “What Exactly Is In My Contract and What Does It Mean”?

March 13, 2020

 

By Lane Hornfeck, Shareholder, Shulman Rogers

Unless your business is in supply chain management or logistics, you likely have not, until very recently, thought about or focused on whether your business contract has a funny sounding clause, called a “force majeure” provision.  A French term literally meaning “superior strength”, it is a mechanism for shifting or allocating risk among the parties to a contract. 

In essence, a force majeure clause suspends or excuses a party’s performance of its obligations under a contract when certain unforeseen or fortuitous circumstances beyond the party’s control arise, making performance literally impossible, commercially impracticable, or totally frustrated.  These events are often referred to as “force majeure events”.  Absent specific terms allowing for such risk-shifting, most courts across the country do not recognize generalized terms of “force majeure events” as enforceable and likewise do not allow mere increased cost or negatively-impacted economic circumstances to justify suspension or nonperformance of obligations under a contract.

Many businesses and their attorneys have been focusing on the impact the novel coronavirus, officially designated COVID-19 by the World Health Organization (“WHO”) and deemed an international pandemic (something not done by the WHO in over a decade), is having on contract performance by manufacturers and suppliers in various industries primarily located in or sourcing from China.  As COVID-19 spreads across the world and the number of cases throughout the United States increase daily, numerous businesses, particularly in the visitor, hospitality and customer service industries, organizing and hosting events, such as large in-person conferences, are assessing whether or not they should or even can cancel and what the risks are in doing so.

If you are finding yourself in this position, the first thing you should do is locate your contract and then talk to your attorney, or find an attorney well-versed in contract interpretation and litigation involving contract interpretation, as well as the case law in your respective jurisdiction, addressing defensive doctrines that may apply in the event your contract does not have a force majeure provision.

Assuming your contract has a force majeure provision, the next thing you need to do is look at it – carefully.  Not all force majeure clauses are identical.  You will want to look for words that allow you to suspend your obligations or terminate the contract without liability (meaning no liquidated damages or you get your money back) for any one or a number of enumerated reasons.  The enumerated reasons typically include:

  • Acts of God
  • War
  • Acts of Terrorism
  • Governmental Actions or Regulations
  • Disasters
  • Strikes or Labor Shortages
  • Civil Disorder or Riots
  • Disease, Epidemic or Pandemic (and if you don’t have these, they should be added)

Other, more-heavily-negotiated force majeure provisions may specifically identify minimum economic thresholds that must be met in order to invoke them, such as but not limited to, if more than “x” percent of participants cancel or cannot attend an event due to travel restrictions imposed.  Stated in terms of English or U.S. law, factors that will be considered in determining whether a force majeure event excuses or suspends performance include whether:

  1. A contractually-defined “force majeure event” has occurred preventing, hindering or impeding the promisor’s performance;
  2. The promisor’s failure to perform is due to circumstance beyond his or her control, and is not a result of his or her own intentional conduct or negligence; and
  3. There is nothing the promisor can reasonably do to avoid the non-performance or to mitigate the effects of the force majeure event.

Similarly, although slightly different semantically, French law (applicable in certain jurisdictions, including Louisiana) provides that performance may be excused by events external (outside of the parties’ control), unforeseeable (by the parties upon its execution), and unavoidable (by any mitigating factors).

If your contract does not have a force majeure clause and/or one that does not clearly allocate risk, you may be able to resort to the statutory doctrine of commercial impracticability under the Uniform Commercial Code (“UCC”) or the common law doctrine of impossibility of performance which, in turn, is grounded in the defensive doctrines of mutual mistake and frustration of purpose.  The essential purpose of each is to discharge an obligor from his or her duty to perform a contract where a failure of a basic assumption of the parties produces a grave failure of the equivalence of value of the exchange to the parties.  

Therefore, in the case of COVID-19 and determining whether performance is excused or suspended, the specific language (or lack thereof) in your contract will absolutely matter.  Has there been a specific governmental action or regulation that renders performance literally impossible or just makes the contract not as financially profitable as expected?  The former will allow termination or suspension, while the latter will not (unless such economic risk allocation is expressly listed in the contract).

As various large public gatherings and conferences are being canceled or postponed across the country, the various parties to them (the attendees, hosts and organizers) are intently studying and interpreting their contracts to determine who should primarily bear the financial burden and risk of such cancellation or termination.  Major events such as Coachella and South by Southwest have already been canceled or postponed.  Many are looking to postponement and credit options in lieu of total cancellation and refunds.  Many, if not all, are also looking to their business interruption insurance policies to determine if there is coverage available in lieu of shifting risk between the contracting parties.

Whatever your contractual language and corresponding jurisdiction may be, be sure to review them carefully before taking any action and definitely work with your attorney in drafting any notices to insure any such notices are fully compliant with your contract terms. 

Finally, remember to wash your hands.