Contractual Considerations in the Wake of the Coronavirus (COVID-19) Pandemic

Categories : Coronavirus

Types : Alerts

Whether it be the closing of schools and college campuses, the shuttering of “non-essential” businesses, the cancellation of the NCAA’s March Madness basketball tournament, or the suspension of Hollywood productions, there is hardly an industry that has not experienced a major disruption relating to the collective effort to combat the spread of the coronavirus pandemic. While preserving the health and well-being of the populace is rightly the focus of these efforts, the widespread shut-down will inevitably raise issues regarding the potential legal exposure that may arise from the shut-down’s impact on a contracting party’s failure to meet its contractual obligations.

In the wake of these disruptions, one contractual provision likely to attract more attention than normal is the “force majeure” clause often found in various forms of commercial agreements. Literally translated from French as “superior force”, a force majeure clause can operate to relieve a party of its contractual obligations under certain circumstances. In order to fall within the protection of a force majeure provision, the non-performing party must establish that performance under the contract would not be possible and that its inability to perform was beyond its control and not due to its own fault or negligence. Additionally, the non-performing party must also demonstrate that it attempted to perform its contractual duty notwithstanding the happening of the intervening event.

In considering where some of the disputes may arise regarding the application of force majeure principles to the current coronavirus shutdown, it is likely they could focus on the requirement that the non-performing party must at least try to discharge its duty rather than immediately invoking the force majeure provision as an excuse for its failure to perform. The requisite level of effort may well vary depending on the circumstances and nature of the contemplated performance and the specific reason why the party did not discharge its duty under the contract. Consideration of whether the failure to perform was due to a government-mandated shutdown as opposed to a voluntary one might be relevant to this inquiry.

Another potential area for disputes could turn on the language of the contract’s force majeure provision itself and whether it covers the current crisis. For instance, while language that specifically lists pandemic among the types of events considered to be force majeure would more obviously cover the instant situation, there could be uncertainty when applying more generalized language referencing, as just one example, “acts of God” (which is often construed to apply to natural disasters). Given the myriad potential formulations of force majeure provisions, the actual language of the contract at issue merits careful analysis.

Montgomery McCracken attorneys are available to assist clients with numerous issues related to COVID-19.  Montgomery McCracken’s COVID-19 Resource Center is available here.