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Using Coronavirus (COVID-19) as a Force Majeure Excusing Contract Performance

Enrico Schaefer - March 15, 2020 - Business Law, Coronavirus Legal Issues

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Coronavirus (COVID-19) is going to cause more than one epidemic. Many businesses will be unable to perform their obligations under their existing contracts, or will simply abandon their obligations to focus on survival. The amount of business disruption is going to be at epidemic levels. The severity of the breaches of agreements and the use of the Force Majeure clause is going to increase exponentially as the Coronavirus continues to spread. Parties need to review their partnerships joint ventures, service contracts, vendor agreements, corporate funding and venture capital agreements and other key contracts to see what rights and obligations they may have to enforce obligations or escape their obligations as a result of Coronavirus.

Does coronavirus relieve you of your contractual obligations?

Your contracts should be reviewed by a competent business or corporate attorney to review the specific language and wording of your force majeure clauses. Is your company, or the pother party to the contract, affected or prevented or delayed in performing contractual obligations? If so, you need to get ahead of the issue, and put a strategy in place to minimize the risks to your business. In fact, virtually any company stands to be impacted by Coronavirus. Doing an audit of key contracts to game plan scenario could be the difference between survival and extinction for you business.

A risk analysis should take a review each party’s rights, obligations, and remedies, if either side is unable to perform.

Question 1: Does the contract have a force majeure clause?

Some agreements do not include a force majeure clause. If not, you may need to contact other parties to the contract early to discuss options and assess risk.

Question 2: Exactly what language is being used in your force majeure provision?

As with most contractual issues, the language used is critical. There are boilerplate force majeure clauses and customized clauses. Some clauses specifically mention pandemics. If a government action or enforcement affects your company, there may be specific language which covers emergency measures by government agencies.

Question 3: What law governs your force majeure clause and your contract?

Determining choice of law will be important since state law typically governs contract interpretation. Each sate will have a body of case law which will be critical in understanding rights and risks. If your contract has a choice of law provision, then that is a great place for your lawyer to start his or her analysis.

Even if the contract does not include a force majeure provision, a force majeure concept (such as the doctrine of impossibility or frustration) could be implied under applicable state contract law.

Question 4: Is the coronavirus outbreak the true reason a party can’t perform?

One issues which will become rampant is the use of coronavirus as an excuse for breach of contract, when the real reason lies elsewhere. Further, many state’s require thee act of god to be the sole cause of the nonperformance. What more could the company have done to avoid the nonperformance in spite of coronavirus.

Question 5: Does the contract require you or your lawyer to provide notice of force majeure?

Force majeure clauses may be conditional upon timely notice. If so, your lawyer should know well in advance what will constitute notice and determine when notice is required, and how notice must be provided to a counter-party. Compliance with notice requirements and mechanisms could determine whether the virus can be used as failure to to perform and whether a court will consider it a breach of the contract.

Question 6: Sound I Declare a Breach?

Relying on a force majeure may result in a claim of breach of contract. It may also indicate that a company no longer intends to perform the contract, resulting in a a repudiation of the contract. Working with your business attorney to understand the contract implications will be mission critical. Developing a strategy early could be the difference between survival and bankruptcy for some companions.

You have questions. Our business contract attorneys can help.

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