The COVID-19 pandemic is changing everything, including how business is done. First, many businesses are having trouble meeting their contractual obligations and are looking to the contract to find relief or a way out. And second, many relationships that were "done deals" before, now may need to be renegotiated.
Force majeure provisions in contracts allow for performance of obligations to be suspended or excused when there is an unforeseen event beyond a party's control that prevents that party from performing. While not included in all contracts, this provision typically allows for acts of God, government orders and often includes a list of assorted other events like labor disputes, transportation delays, terrorism, and similar circumstances. Rarely do force majeure provisions expressly address disease outbreak. So, in the COVID-19 situation we currently face, the question of whether the pandemic qualifies as a force majeure will turn on the specific language of the provision itself as well as the state law governing the contract.
A global pandemic may qualify as a force majeure, but not always: for example, under New York law, the force majeure provision should expressly include words such as "pandemic" or "disease outbreak" to qualify, but not all states interpret the provision so narrowly. Typically, the court will consider the parties' intent of including a particular event, and then see if that event actually prevented a party's performance. The analysis will depend on the wording of the force majeure provision as well as the law of the state which governs that contract.
Even if a contract does not include a force majeure provision, or if the force majeure provision does not include the specific event, there still may be a way out based on the defense that performance is impossible. This defense, however, is also subject to interpretation which may vary depending on which state's law governs the contract. Under some states' law, even full or partial shutdown of business may not be enough to excuse nonperformance.
This is the time to scrutinize the details of your company’s major contracts in anticipation of your own company’s or a vendor’s delayed performance or a failure to perform. Below are some practical issues that should be considered:
- Does the contract include a force majeure clause, and if so, is it general or does it specifically reference words like "pandemic," "epidemic," "disease," or "quarantine"?
- Does the force majeure clause specify certain remedies, such as schedule or price adjustments?
- Does the force majeure clause give the customer the right to terminate the contract if the event continues longer than a specified amount of time?
- Does the force majeure clause require payment obligations to continue despite the other party's nonperformance?
- What are the notification requirements in the force majeure clause?
- Is there business interruption and commercial insurance that will compensate for losses?
Osensky Law offers legal assistance to companies interested in having certain contracts or their entire contract portfolios reviewed in the face of COVID-19. For analysis on how COVID-19 affects your contracts and relationships with customers and suppliers, or advice on how to safeguard against such risk when entering into new contracts, please contact tanya@osenskylaw.com.