COVID-19 contract considerations for businesses: Force majeure and other noteworthy provisions
Since late 2019, COVID-19 has been spreading across the world and has now reached nearly every U.S. state. With self-isolation recommendations affecting businesses in every industry, many businesses will be unable to fully perform their obligations under their contracts. Understanding the risks of nonperformance and methods to address the coronavirus pandemic, and future epidemics, is crucial now more than ever.
As a result, businesses should consider the following checklist:
- Force majeure basics. First, businesses should look at the contract at issue and analyze the force majeure clause. These clauses generally operate to excuse a party from the contract when an event beyond a party’s control (a “force majeure event”) occurs. The event must change the circumstances to make performance impossible, illegal, or commercial impracticable. However, catch-all phrases, such as “causes beyond the parties’ control,” in a force majeure clause may not protect a canceling party from the impact of COVID 19. Additionally, businesses should identify whether the contract requires notice of the force majeure event and the breadth of nonperformance. For instance, some contracts may eliminate performance if a force majeure event occurs, while others may only suspend or delay performance.
- Force majeure clauses and state laws. Second, businesses should understand which state’s law applies. Understanding the applicable state’s law is crucial because some states analyze force majeure clauses broadly and may consider COVID-19’s impact because it is merely “beyond the parties’ control”, while other states analyze force majeure clauses narrowly and the force majeure event must be listed in the clause or be similar in nature to the events specifically listed.
- Application of common law contract doctrines. Third, understand whether the state’s courts apply the doctrines of “impracticability” and “frustration of purpose.” Relying on common law contract doctrines is not ideal, and each state’s case law cannot be synthesized into applicable principles. Instead, businesses should understand that, in extreme situations, these may be available.
- Other clauses. Fourth, businesses should look at additional clauses within the contract to understand their rights and responsibilities. By analyzing the contract and determining how additional terms could be impacted by COVID-19, businesses will better understand the risks of breach and potential methods to avoid additional consequences.
Considerations going forward:
The circumstance surrounding COVID-19 is changing minute by minute. Whether your business is unable to perform or anticipating a contracting party’s nonperformance, everyone should document the potential costs, impact of time, and ability to mitigate in every situation. And, if a party will not be able to perform based on the impact of COVID-19, then the party should raise the possibility early.
Besides evaluating current contracts, businesses should be wary of signing a contract without the force majeure clause addressing a scenario – like COVID-19 – where the government restricts travel, shutdowns markets, or imposes quarantines.