Does your business contract recognise coronavirus?

The novel coronavirus (COVID-19) is now a global pandemic. Numerous deaths are reported worldwide and catastrophic consequences for businesses and the economy are on the rise as well. Cancellation of flights, shutdown of public places, and remote offices has caused unprecedented disruption to businesses across the globe.

Our preliminary concerns would revolve around the health and safety of our loved ones, employees, customers, and neighbours. But when the dust settles, business leaders from the C-suite to owners of convenience stores would be left wondering how the pandemic will affect their business contracts. The answer to which is particularly important for small and medium businesses, who may not have a robust cash flow or necessary resources to deal with such a crisis.

As a result of this outbreak, several companies are examining their contracts to understand the extent of their rights, remedies, and obligations with respect to their business associates. Suppliers of goods and services unable to deliver on contractual obligations are looking to see what provisions, if any, may protect them from a default. One such provision of particular concern is the ‘Force Majeure’ clause.

What is the ‘Force Majeure’ clause?

Fundamentally, a force majeure is an unforeseen or unavoidable event beyond the reasonable control of the parties to an agreement that serves as an excuse or delay in the affected party’s performance of its obligations under the agreement. Common force majeure events include floods, fires, earthquakes, wars, terrorist attacks, and government orders. But this is not an exhaustive list of events and there lies the problem.

The Force Majeure clause excuses non-performance of contractual obligations for events specified under the clause. But if an event not specified under the force majeure provision occurs, then the impacted party may not be excused from performance. Simply put, if the impacted party is unable to perform, it is likely in breach of the contract.

If the contract does not specify events such as “epidemics and quarantines” or “pandemics” in its Force Majeure clause, a party may have a difficult time claiming they are excused from contractual obligations because COVID-19 has rendered a party unable to perform the contractual duties. But, is their failure to perform excused under the Force Majeure clause? Ultimately, it comes down to what the contract says and how a court of law interprets the clause.

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Challenges in the Force Majeure defense

Part of the challenge lies with the fact that there is no universal standard definition for force majeure, and they often vary across agreement types and industries. The performance of one party might be completely excused by one force majeure provision, while under another, the contract might defer performance of the obligation until the force majeure event ceases, and yet another may require strict performance of the obligations or face penalty.

So, when public health crises or pandemic events such as the current COVID-19 outbreak are not explicitly included in the agreements—as is most commonly observed—creative arguments and legal advocacy will be critical in creating the best interpretation of the provision to support a force majeure defense.

Ultimately, and most importantly, the issue depends on an assessment of:

• the nature and context of your particular contract;
• the words in the relevant Force Majeure clause; and
• the general terms of the contract, including the substantive law / governing law clause.

To assess a business’ rights, obligations, and remedies, whether the business is the party unable to perform or such counterparty, the following should be considered:

• What contract provisions are relevant? Firstly, companies should determine whether their contracts include a force majeure clause, and whether there any other relevant provisions to further examine. Provisions concerning any violation, termination, cancellation, and/or repudiation may be applicable under the given situation.

• How does the contract define a force majeure event? The language in contracts maybe as broad or restricted as agreeable to parties to the contract. A contract may either explicitly list all qualifying events, or generally define a force majeure event as “an event beyond the parties’ control”, leaving room for interpretation. Considering the extraordinary circumstances of its emergence, most our contracts may not have it listed directly as a force majeure event. In the latter scenario, companies must look for examples of relevant language such as “disease,” “epidemic,” “pandemic,” “quarantine,” or “acts of government,” which maybe interpreted to include the COVID-19 outbreak.

• Is the coronavirus outbreak the cause of the party’s nonperformance? Mere existence of COVID-19 in the city does not exempt a company from performance of its contractual obligations. Also, if other factors lead to the party’s non-performance, then a force majeure clause may not be applicable. For example, to the extent a company takes proactive steps to curb the spread of the virus, by, say, advising workers to stay home, does the resulting failure to perform constitute a force majeure event?

Practical tips

Here are some brief tips in dealing with COVID-19 relative to contracts:

• Carefully review your contracts to determine your rights and obligations under these agreements, as well as any risks associated with the consequences and potential for recovery of additional costs or a price adjustment as a result of a work delay or stoppage.
• Contractors should also carefully review their subcontracts to determine their rights, obligations and potential for recovery.
• If a long list of force majeure events is included, it is likely to be helpful (where you are seeking to rely on the clause) if pertinent wording is included such as “pandemic”, “epidemic”, “outbreak”, “crisis” or “governmental action”.
• Watch out for wording in new contracts that requires that the event of force majeure is “unforeseeable”.
• Communicate and properly document the incurrence of such additional costs to include any potential mitigation of such costs. The point here is to document, document, document, and communicate, communicate, communicate.

(Edited by Evelyn Ratnakumar)