The Coronavirus’ Effect on Contracts: Can the Pandemic be a ‘Force Majeure’?
March 12, 2020
On March 11, 2020, the World Health Organization officially declared the COVID-19 viral disease (commonly known as the Coronavirus) to be a pandemic. In the following days, President Trump imposed a sweeping travel restriction to Europe, schools ceased in-person classes, cruise lines suspended operations, and major sporting events have been cancelled.
These recent events only solidify the fact that the Coronavirus will affect the performance of contractual duties for businesses in various sectors. However, does the unforeseen and uncontrollable nature of the pandemic excuse the performance of contractual duties?
Some contracts contain what is known as a “force majeure” clause – which serves to excuse a party’s non-performance (or partial performance) of a contractual duty in certain unforeseen events. In some instances, a force majeure clause explicitly lists a pandemic as a valid excuse to perform contractual performance for a certain period.1 Yet not all force majeure clauses are this specific. Some may only list acts of God, acts of government, or other unforeseen interruptions or delays as qualifying events. Thus, the precise language of the contract is vital to determining whether performance may be excused in some form due to the Coronavirus pandemic.
In all instances, it is important to consider the following steps if your contractual relationships are impacted by the Coronavirus:
- Preserve all communications, records, and documents that reflect impact on the performance of contractual duties caused by the Coronavirus;
- Draft a contemporaneous narrative that reflects such impact. Such narratives should include descriptions and citations to the nature/scope of the pandemic and pertinent developments;
- Assess whether you can practicably surmount the obstacles faced. Some contracts require a force majeure event to be mitigated to the fullest extent possible. Moreover, some contracts specify that a force majeure defense is only valid temporarily while the hardship is taking place;
- Determine if your commercial property insurance or other insurance products provide coverage for business interruption; and
- Retain legal counsel to review affected contracts so you can best proceed in your particular circumstance. If your current affected contract does not contain a force majeure provision, ask legal counsel whether the contract may be legally amended or terminated if necessary, and whether you will face any adverse effects from such action. Be aware that if a force majeure provision does not apply, the nonperformance of contractual duties may constitute a material adverse event and/or a default of the underlying agreement.
Since the economic impacts of the Coronavirus pandemic are rapidly unfolding, it is imperative for all contracted entities to assess the situation carefully, and to be prepared to protect their interests.
1 See, e.g., Failure of presupposed conditions-Seller's right to extend delivery time or cancel, 1 Mich. UCC Forms Annotated § 440.2615 Form 23 (3d ed.).