Covid-19 & Contract Obligation Issues
April 1, 2020 | Mitchel Denham, Partner, DBL Law
The coronavirus pandemic is taking a toll on our families and businesses. Our government, healthcare system, and private industries are working diligently to curb the pandemic through various measures. The National Basketball Association has suspended its season, the NCAA cancelled its March Madness basketball tournament, along with all its spring sports, and the Masters was delayed. School closings, entertainment events cancellations, and travel restrictions are being announced daily. “Social distancing” has become an everyday phrase. We are in unchartered territory for modern times. Staying healthy and limiting the spread of the virus is paramount.
Many existing contracts will be affected by this pandemic either by delays or cancellations, especially contracts requiring travel or involving the delivery of goods and services. Force majeure provisions play an important role in determining the parties’ right to cancel and or delay performance obligations under existing contracts.
Force Majeure Clauses.
Many long-term contracts contain what is referred to as a “Force Majeure” provision. Force majeure means “superior force.” A force majeure clause is common in contracts to protect the parties in the event that a part or all of the contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of due care.
Before a party may be excused from performance, it must make two preliminary determinations. First, does the contract contain a force majeure clause? Second, does the clause cover non-performance or delayed performance due to a pandemic? If the answer to both is yes, then performance could possibly be delayed or excused.
To answer the first question, a party should carefully review the contract to identify whether it contains a force majeure clause or any language which may be construed as such. Usually, if an attorney has drafted the contract, there will be a separately identified paragraph describing the contractual rights. More basic contracts may have no provision at all or language tucked away in a miscellaneous section.
If a provision exists, courts generally review the plain language of the contract to determine if it is applicable. However, this analysis is different depending on which law governs the contract. Many force majeure clauses have broad language which excuses performance if an event occurs outside of the parties’ control and could not be avoided. Others specifically list examples of events which trigger the provision. Sometimes that list includes epidemics.
It is important to note that force majeure provisions do not excuse non-performance caused by bad business decisions or failure to perform for reasons that were reasonably within the party’s control. To determine whether and how the provision may be invoked, a party must consider:
- Whether the contract contain a force majeure provision;
- Which state law governs the contract interpretation;
- What is the definition of a force majeure event that triggers the provision;
- Did the outbreak of the coronavirus actually prevent the party asserting force majeure from performing;
- Was the outbreak reasonably foreseeable at the time the contract was executed; and
- Did the asserting party have the ability to mitigate the effects of the outbreak on its non-performance?
These and other questions will need to be answered when determining whether non-performance or delayed performance of contractual obligations may be excused under a force majeure provision.