As the Coronavirus (COVID-19) spreads, businesses will be affected in many ways. If a business cannot operate as a result of a government-ordered closure, a number of its employees are quarantined or hospitalized, or materials cannot be obtained as a result of the virus, then the affected business may have a difficult time meeting its contractual deadlines.
Each business should review its contracts to see whether each contract contains a so-called “force majeure” provision. These provisions define circumstances beyond the reasonable control of the obligated party and permits relief for such party’s nonperformance in the event of such circumstance. A typical force majeure provision may read as follows:
In the event that either party shall be delayed or prevented from the performance of any act required by this Agreement by reason of acts of God, strikes, lockouts, labor troubles, inability to procure materials, restrictive governmental laws, or regulations or other cause, without fault and beyond the reasonable control of the party obligated (financial inability excepted), performance of such act shall be excused for the period of the delay provided that the party claiming such delay shall have given written notice to the other party within the time originally required for such performance, specifying the reason for the delay.
If the contract contains a force majeure provision, then the next question is whether an epidemic, pandemic, or quarantine is one of the circumstances beyond the reasonable control of the obligated party as defined in such provision. Is the provision narrowly defined to include only specific circumstances (and if such, is an epidemic, pandemic, or quarantine one of those circumstances) or does the provision contain the broad catchall “causes beyond the reasonable control of the obligated party”, and in either event, is there a causal link between the circumstance and the business’ failure to perform under the contract? In addition to understanding what circumstances may be covered by a force majeure provision, each business needs to be aware of any required notice to be given to the other party and the period of time in which such business’ performance may be excused.
Even if the contract does not contain a force majeure provision, there may be defenses available to the business under the Uniform Commercial Code or common law (e.g., the doctrine of impossibility of performance).
It is important for each business to understand the circumstances under with it could declare a force majeure. For more information on force majeure provisions, contact Theodore F. Claypoole or another member of the business group at Unruh, Turner, Burke & Frees.