With the rapid proliferation of Coronavirus companies across the globe are increasingly
encountering interference with the regular course of business. These interruptions include
supply chain holdups, quarantines, lockdowns, staff absences and travel restrictions, not to
mention disruptions caused by sheer fear connected to the virus. Though, should the worldwide
expansion of Coronavirus constitute a force majeure event excusing contractual performance,
nullifying contractual responsibilities and freeing parties from liability?
More often than not company contracts include force majeure provisions, which state that if an
exceptional occurrence beyond a business’s control transpires, that business’s contractual
performance can be excused. Such occurrences normally include acts of God, government
orders or strikes. However, are virus pandemics included as the occurrence of an extraordinary circumstance or event beyond the control of the parties?
Well, ask your judge
In truth inclusion varies based on the verbiage of the agreement. Some agreements include
clauses that specifically exclude or include pandemics, or outbreaks. Most frequently though,
an agreement does not address these types of scenarios head on, but a pandemic may be
included under other clauses, such as language that considers government actions as a force
majeure event all the same.
In those instances businesses that are for example affected by government-mandated lock
downs or movement restrictions may indeed have an excuse for contractual non performance.
Normally what this means is that the other party to the agreement could not terminate it
because of non performance, or delays, for the full length of the force majeure event whatever it
may be. Nonetheless ramifications may differ based on the language of the contracts and,
should there be a dispute or breach, the interpretation of a judge.
UCC and court thinking
The normative place to look for guidance on agreements for the sale of goods is the Uniform
Commercial Code (UCC) which governs them. Though it contains no particular verbiage that
relates to force majeure, the UCC does account for the basic assumption that should there be a
global altering occurrence and the performance of an agreement becomes impracticable, then
the seller might not be held responsible for the terms of the original agreement [1]. For many
businesses this may constitute an avenue leading to sanctioned contractual nonperformance.
The courts and case law end up in a rather similar place by traditionally defining force majeure
as “an event or effect that can be neither anticipated nor controlled” [2] including both acts of
nature and people. Neither of which clearly covers pandemics, especially when the force
majeure clause does not specifically refer to it. [3]
Instead when determining if a situation constitutes a force majeure event to excuse a party’s
performance, courts normally will weigh if the verbiage in the force majeure provision:
specifically refers to the situation as beyond the control of the parties, if the force majeure
situation was caused by party non performance itself and if the force majeure event was
foreseeable at all. [4]
When a court’s force majeure analysis is completed a non performing party will need to show
that it took reasonable steps to mitigate the force majeure event and its implications. Largely
based on the facts surrounding the agreement, whether a party relied on the force majeure
clause and each parties obligations under the contract, courts will frequently assess if there
were any other ways for the non performing party to satisfy its obligations under the agreement.
Application to Coronavirus
When it comes to the Coronavirus no matter if an agreement includes a force majerece clause,
or not, the prudent course of action frequently is for a business to reach out directly to clients,
staff and suppliers to explain and cover any delays, cancellations or other problems in a
transparent and orderly manner. This behavior can make certain everyone is very much on the
same page, and the businesses and customers involved might appreciate proactive outreach
during a time of uncertainty. Based on the verbiage of the agreement a business might also be
mandated to give notice to the other party or perhaps take mitigating steps based on the
situation at hand.
Additional company Coronavirus considerations will vary based on the type of company and its
actual locations. Businesses with clients, operations or suppliers in Asia, North America and
many areas of Europe should get ready for, and many have already experienced significant
delays to manufacturing and distribution, along with staff absences. Since it is not easy to
predict the length of these delays, some businesses will need to locate secondary channels for
distribution and supplies. As well, businesses that have insurance for business interruption
should verify with their insurer to assess whether a viral pandemic, which many times is not
included from the scope of such insurance policies, would in fact be covered as well.
Takeaways and Best Practices
The effects of the Coronavirus notwithstanding, the worldwide pandemic presents an
opportunity for companies to review and if needed revise verbiage in their agreements to
account for at least the potential of very unusual scenarios in an increasingly interconnected
economy spanning the globe. In the face of trying public health concerns, businesses should
take a closer look at the force majeure provisions in their agreements to determine their
responsibilities when contractual non performance becomes a significant issue that cannot not
be denied.
When doing so, best practices a company should take into consideration in relation to their
business agreements include highlighting specific provisions of any force majeure clause since
judges will frequently pardon contractual non performance when the force majeure situation is
clearly stated in the provision. With regards to Coronavirus force majeure clauses should
specify situations including outbreaks, pandemics, lockdowns and quarantines.
Additionally it is prudent for the non performing party to take all reasonable steps to mitigate the force majeure situation, whenever possible, and follow any related procedural Coronavirus-related requirements delineated in the agreement.
Lastly while many force majeure situations are typically constrained to specific locations and times, the Coronavirus has spread with such velocity and scope that the extent of the pandemic keeps changing. Therefore it is wise for a party to communicate evergreen-type force majeure notices that take into consideration the evolving nature of the Coronavirus pandemic and its resulting effect on a party’s ability to meet its responsibilities under their agreements.
Notes:
[1] See U.C.C. § 2-615
[2] See Stepnicka v. Grant Park 2 LLC, 2013 IL App (1st) 113229-U, *4 n. 2 (June 21, 2013) (citing Black’s Law Dictionary 718 (9th ed. 2009)).
[3] See Phelps v. School Dist. No. 109, Wayne County, 302 Ill. 193 (1922).
[4] See Reade v. Stoneybrook Realty LLC, 63 A.D.3d 433, 434 (N.Y. App. Div. 2009).
