Test Your Contracts Before COVID-19 Does

By John D. Burns

Have you considered that Coronavirus could potentially affect your business’s supply chain? Your events? Even your sponsorships? With the outbreak of a novel Coronavirus called COVID-19 in Wuhan province in China and its seemingly inexorable spread to other areas of the world, we must anticipate the inevitable, profound effects on the economy. As governments around the world and here at home react to the threat of a pandemic, public health authorities may take any number of actions, from issuing travel bans to closing factories and schools and cancelling large public events. 

Discussion of the public and personal health impacts of this virus is best left to the experts, but businesses and organizations may find the crisis affecting the bottom line as well. Some may find that the outbreak completely upends important plans and relationships.

Airlines in the United States are already reporting and reacting to steep declines in passenger traffic. Business and leisure travel plans are suddenly uncertain, as consumers and businesses alike wait to see how others will react.

So what do you do, for instance, if a supplier’s factory is closed due to a public health order and key supplies for your business are not delivered on time? What do you do if your organization is holding a conference two months from now, and your attendees are beginning to cancel? Can you get out of that hotel contract?  

The answer to these questions may be found in the language of your contract itself, usually hidden in the seldom-read and little-reviewed last few paragraphs of a form that might have been completed in haste and quickly forgotten. We often refer to these provisions as “Act of God” or “Force Majeure” clauses. “Force Majeure” is a legal French term that refers to acts and occurrences outside of the control of either party to the contract which put performance of the contract itself at risk. A “Force Majeure” clause is a provision of the contract in which the parties attempt to be specific as to how that risk will be addressed if it ever occurs. A typical Force Majeure clause may read something like this:

(i) Force Majeure. If and to the extent that a Party’s performance of any of its obligations pursuant to this Agreement is prevented, hindered or delayed by fire, flood, earthquake, elements of nature or acts of God, acts of war, terrorism, riots, civil disorders, rebellions, revolutions, strikes, labor disputes, or any other similar cause beyond the reasonable control of such Party (each, a “Force Majeure Event”), then the non-performing, hindered or delayed Party shall be excused for such non-performance, hindrance or delay, as applicable, of those obligations affected by the Force Majeure Event for as long as such Force Majeure Event continues; provided, that such Party continues to use commercially reasonable efforts to recommence performance whenever and to whatever extent possible without delay, including through the use of alternate sources, workaround plans or other means. Notwithstanding the preceding sentence, if the Force Majeure Event continues for a period of more than thirty (30) days, either Party may thereafter exercise its rights, if any, pursuant to Section 15, to deliver a notice of termination, subject to any cure period that may be required by Section 15. The Party whose performance is prevented, hindered or delayed by a Force Majeure Event shall promptly notify the other Party in writing of the occurrence of a Force Majeure Event and describe in reasonable detail the nature of the Force Majeure Event.

Other versions of this clause may not be so carefully drafted. Some contracts may lack the provision at all. Unfortunately, in most cases that find themselves in the court system, the underlying problem arises and is either not covered at all by the contract or is covered by a portion of a contract that neither party ever expected to come into play, and thus gave short-shrift in the drafting process. Force Majeure is often one of those situations.

Many American businesses have already seen supply disruptions from factories in China, the epicenter of the event, and as early as February 11, 2020, over 100 Chinese companies had already sought certification from the Chinese government under Chinese law that the epidemic qualified as a Force Majeure event. Should the outbreak continue its spread into the United States, we can expect American suppliers and customers to begin to make the same arguments.

So, for business owners and leaders of other organizations, it would be prudent to check crucial contracts, particularly those that require regular supply of goods on which the business may depend. Is there a Force Majeure or Act of God clause? Does it cover government action or pandemics? Will it apply to this situation? If you are a supplier, and you anticipate your factory will be taken offline due to illnesses or a government “stay at home” order, does your contract require you to notify your customers within a certain span of time?  Do you have to exercise due diligence to find another way to fulfill the terms of your contract? At whose expense?

Even personal contracts may be affected and may contain these clauses: If you promised to fill a block of rooms at a resort hotel with your wedding party, and your guests either will not travel due to fear of the virus or cannot travel due to a quarantine, what is your responsibility to notify that hotel? Can you get your deposit back? 

The time to try to answer these questions is now. At best, the need never arises, but weak contract language can be shored up for future events. At worst, extensive losses may be prevented or minimized in the face of a crisis.

The most important thing, of course, is to stay healthy and listen to the experts in how to address this major event. But if you have questions about your contracts and how to respond, the attorneys at Forrest Firm can assist you. Contact us for a complimentary consultation with an experienced attorney.