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Force Majeure, Contracts and Coronavirus
The threat posed by the novel coronavirus (COVID-19) has led to nonperformance of contracts on a large scale as closures, shortages, supply chain issues, defensive action and other problems disrupt the status quo. It’s an important time for businesses to review contracts and obligations of both parties to learn whether force majeure applies to performance.
As businesses around the world react to the recent and daunting threat posed by the novel coronavirus (COVID-19), it is clear that there will be nonperformance of contracts on a large scale as closures, shortages, supply chain issues, defensive action and other problems disrupt the status quo. It’s an important time for businesses to review contracts and obligations of both parties to learn whether force majeure applies to performance.
What is force majeure and how does it apply to my contract?
Contracts may contain a clause that will excuse some sort of contractual failure to perform should that nonperformance be caused by an unforeseen event beyond the parties’ control. For these “force majeure” or “Act of God” provisions to apply, there generally must be a causal link between a party’s failure to perform and some sort of disruptive, unforeseeable event, such as a natural or man-made disaster. Medical epidemics may even be specifically included in force majeure clauses, considering the high levels of disruption they may cause. Conversely, certain agreements may expressly exclude specific types of events.
Whether or not COVID-19 will qualify as a force majeure event for purposes of such a contract provision may depend on the language of the clause itself – as a declared “global pandemic” and “national emergency,” COVID-19 will most likely qualify under broad force majeure clauses and those that include epidemics or other similar medical emergencies among the enumerated events. The wording of the provision will come under heavy scrutiny should a party fail to perform as required by the contract.
Other questions come into play based upon the specific wording of the provisions, such as whether a force majeure clause may be triggered by a delayed performance, rather than one fully prevented by the event; how much of the performance is excused; if there are acceptable alternative performances; if notice is required before nonperformance; which jurisdiction’s law governs; etc. In most cases interpreting such provisions, the court expects the nonperforming party to take all commercially reasonable steps to perform to the extent possible.
What if my contract does not have a force majeure clause?
It will be more difficult for a party to excuse nonperformance of a contract without a force majeure clause, but it may not be impossible. There are several doctrines of contract interpretation that may excuse nonperformance when a supervening event (such as a global pandemic) has occurred:
- The doctrine of frustration of purpose may apply when the principal purpose for creating the contract becomes frustrated by an unforeseeable event that is no fault of the party seeking excuse of nonperformance. Performance isn’t impossible or impractical, but one party’s purpose for making the deal no longer exists.
- The doctrine of impracticability may excuse a party from performance when an intervening event occurs to make that performance unfeasible. The event materially alters the nature of the party’s obligations, resulting in an excessive and unreasonable increase in performance costs. This has been codified in Kentucky at KRS § 355.2-615:
“Except so far as a seller may have assumed a greater obligation and subject to KRS 355.2-614 on substituted performance:
(a) Delay in delivery or nondelivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.
(b) Where the clauses mentioned in paragraph (a) affect only a part of the seller's capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.
(c) The seller must notify the buyer seasonably that there will be delay or nondelivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.”
- The doctrine of impossibility may excuse performance when performance itself is no longer possible.
What should I do?
The first thing to do is review existing contracts to determine (a) whether a force majeure clause exists and (b) what each party’s performance duties are, whether they might be affected by issues related to COVID-19, and what each party can reasonably do to perform to the extent possible. Now is the time for parties to engage in discussions to mitigate any damage that can be caused by nonperformance and renegotiate problematic issues. The attorneys at McBrayer can help businesses evaluate contracts for performance problem areas and rework deals as needed to combat the economic threat of the coronavirus pandemic.
Maria C. Doyle is a Member with McBrayer law in the Louisville office. Ms. Doyle focuses her practice areas to hemp, agriculture, business and corporate law, mergers and acquisitions, sales and dissolutions and taxation. She can be reached at firstname.lastname@example.org or (502) 327-5400 ext. 2353.
Douglas T. Logsdon is a Member at McBrayer. Mr. Logsdon serves clients in the areas of creditors' rights and foreclosures, bankruptcy, and civil litigation. Contact him at email@example.com or (859) 231-8780, ext. 1306.
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This article does not constitute legal advice.