In the last few days, I have been receiving a number of calls from clients whose businesses are being affected by the Coronavirus (COVID-19). Whether you believe this is all unnecessary panic, or simply an exaggerated event, the economic impact now being felt by clients, their customers, their contractors, their suppliers--their businesses--is having significant economic consequences. The main questions being posed are: who bears the costs of these economic impacts and are there possible defenses or ways to recover the costs if a party to a contract cannot perform its contractual obligations?
The answers to these questions have largely centered around the force majeure provisions of various business contracts. The concept of “force majeure” is that a party’s performance of its contractual obligations may be excused where performance is prevented or frustrated due to an unusual event that is beyond the contracting parties’ control--sometimes referred to as an "Act of God." This concept is seen in a variety of contracts: business contracts, insurance contracts, sales contracts and commercial leases, to name a few.
Often this clause is last thing the parties negotiate, or even pay attention to, because the chances of it becoming an important contract term are remote (depending on the type of business or industry). And yet, here we are, with a kind of Act of God in the form of a pandemic virus. And now that this has become a contractual issue for many businesses, it is time to evaluate and determine if a party can rely on it to not perform or to excuse performance of a contractual obligation.
The answers to these questions have largely centered around the force majeure provisions of various business contracts. The concept of “force majeure” is that a party’s performance of its contractual obligations may be excused where performance is prevented or frustrated due to an unusual event that is beyond the contracting parties’ control--sometimes referred to as an "Act of God." This concept is seen in a variety of contracts: business contracts, insurance contracts, sales contracts and commercial leases, to name a few.
Often this clause is last thing the parties negotiate, or even pay attention to, because the chances of it becoming an important contract term are remote (depending on the type of business or industry). And yet, here we are, with a kind of Act of God in the form of a pandemic virus. And now that this has become a contractual issue for many businesses, it is time to evaluate and determine if a party can rely on it to not perform or to excuse performance of a contractual obligation.
Like all contract provisions, the clause needs to be looked at carefully. Hopefully, it was well-drafted.
So, what to do if this clause is looking like it's your only way out of a difficult (and hopefully temporary) situation?
So, what to do if this clause is looking like it's your only way out of a difficult (and hopefully temporary) situation?
- Evaluate your contracts to determine the applicability of a force majeure clause to the current COVID-19 situation.
- Identify any actual or potential consequences arising from the situation both within your company and your supply chain.
- If you do identify consequences, assess and determine what it will take to respond and whether and to what extent there are actions that you can take to address or mitigate the situation.
- Be sure to track the consequences of the pandemic on your business and your efforts to address them. (This may serve you well when you later need to rely on the clause as a defense to nonperformance).
- Determine if you have any notice or reporting requirements as these may be prerequisites or pre-conditions to your ability to assert defenses or seek relief.
- Review your insurance policies to assess any applicable coverage for losses resulting from the Coronavirus, including supply chain disruption and business interruption.
- If you are encountering a consequence that you think may constitute a force majeure event, contact your attorney to make sure you act in a way that minimizes your potential liability.
The Bottom Line: The COVID-19 situation will continue to change daily. It is a good time to review your contracts for this little-paid-attention-to clause called force majeure. It may save your business.
