Could the COVID-19 Coronavirus from Wuhan, China be a Terminal Illness for your Contract? Force Majeure, Acts of God, and Your Business
PLEASE FOLLOW THE ADVICE BEING GIVEN TO YOU BY MEDICAL PROFESSIONALS OR GOVERNMENT AUTHORITIES AS THE COVID-19 SITUATION DEVELOPS AROUND THE WORLDMany people are now under quarantine or “social distancing” measures due to the novel coronavirus that was spawned in Wuhan, China and is now sweeping the globe. Of course, this virus could have some serious implications for your health, and it’s important to be responsible. But, the virus could also have some serious implications for your business. “But Ryan, you’re a lawyer, not a doctor. What on earth do you have to say about the coronavirus?” Well, I’m glad you asked. First of all, you should listen to medical professionals. Second, this article isn’t just blatant clickbait. It will consider the implications of coronavirus for something that all long-term contracts (and some short-term contracts) should have – a force majeure clause. If your long term contracts don’t have a force majeure clause, you could be playing with fire. I’ll explain why, if it isn’t already clear to you from seeing supply disruptions and similar occurrences.
A quick Side Note on Terminology
In this article, I use “coronavirus” and “COVID-19” interchangeably. Technically, this is incorrect and neither of those is the proper way to refer to the virus itself. Coronaviruses are a family of viruses, and there are many members of this family. Most of them cause only very minor symptoms, but some can be pretty nasty (like SARS or MERS).
Think of it this way… “dogs” would include both Chihuahuas and Rottweilers, or “sharks” would include both Nurse Sharks and Great Whites. Likewise, the family “coronaviruses” includes many, many viruses that cause merely a small sniffle/cold and nothing more, but it also includes some much nastier viruses like SARS and MERS. This particular coronavirus is unfortunately one of the more gnarly and contagious members of the family.
Similarly, COVID-19 is technically the name of the illness/disease resulting from the virus (not the name of the virus itself). The virus itself has been named SARS-CoV-2. But that’s cumbersome. So, for the sake of convenience and readability, I’ll refer to it as “coronavirus” or “COVID-19”.Suppose you manufacture and sell widgets (and by the way, a “widget” in this context is simply a stand-in for a good; it could be any good) and, as part of your widget-manufacturing process, you depend on some components from a factory in Wuhan, China. As a result of the coronavirus and the changes to production schedules of Chinese factories caused by it, you can’t get the components you need this month. And it’s too short of notice to contract another factory to produce the components. So, you cannot make your widgets this month. It wasn’t your fault and it wasn’t your supplier’s fault (i.e., it was not your fault for choosing a disruption-prone supplier). But you will miss your widget deliveries to your customers. Now we arrive at the point: who pays for the disruption? Your contract might address this situation. Especially if you retained a competent business attorney to draft or help you draft your contract. It might say “if you can’t make widgets due to a war, fire, or pandemic, you are relieved from performance and don’t owe any damages” (I’m simplifying). If it does, you’re cool. But if it doesn’t, you might be in some real trouble. “How could my contract cover this scenario? Was I supposed to predict the coronavirus 5 years ago when we drafted the contract? That is absurd.” Predicting SPECIFICALLY THIS coronavirus – yes, you’re right… that would have been absurd. But a force majeure clause is much more than that. A force majeure clause will cover various situations that could cause a business disruption. Sample Force Majeure Clauses Here is one sample clause:
So, would the foregoing cover your widget disruption as a result of the COVID-19 coronavirus? Well, the delay in performance would definitely be beyond the reasonable control of the defaulting party. So, maybe yes. But, it could also be a general economic condition or general market effect. So, maybe no. My Assessment: Unclear But, let’s thicken the plot a little bit. Let’s say that the virus itself did not directly cause the delay, but rather the cause was the resulting economic conditions and/or economy-wide quarantine & social distancing measures. Does this change the result? (and is that result different depending upon whether the economic effects are a result of “unenforceable” guidance from medical officials or a result of enforceable orders from governmental officials?) Again, somewhat unclear. This situation is worse for both parties than a clear yes or no, because it does not clearly specify whether a situation like the COVID-19 Coronavirus will excuse performance. Ideally, this risk should have been allocated according to a business decision between the parties, and the clause drafted accordingly. What about a more detailed clause? Here is one example:
Force Majeure. A party shall not be liable for any failure of or delay in the performance of this agreement for the period that such failure or delay
(1) is beyond the reasonable control of a party,
(2) materially affects the performance of any of its obligations under this agreement, and
(3) could not reasonably have been foreseen or provided against, but
will not be excused for failure or delay resulting from only general economic conditions or other general market effects.
Performance Excused Due to Force Majeure: Neither party is responsible for any failure to perform its obligations under this contract, if it is prevented or delayed in performing those obligations by an event of force majeure. Definition of Force Majeure: Force majeure for the purposes of this clause means: riot, war, invasion, act of foreign enemies, hostilities (whether war be declared or not), acts of terrorism, civil war, rebellion, revolution, insurrection of military or usurped power, government-ordered closures, requisition or compulsory acquisition by any governmental or competent authority, radiation or contamination or other hazardous properties of any explosive assembly or nuclear component, earthquakes, flood, fire, disease, epidemic, or other physical natural disaster, strikes, labor disputes, sit-ins, or industrial disputes, strike or industrial disputes, or direct results of any of the foregoing.So, what about this clause? Does this language cover the COVID-19 Coronavirus? Because it was drafted to include, at different places, both “epidemic” and “government-ordered closures” this clause seems to clearly include the Coronavirus. Verdict: Yes Or, on the other hand, if it had been agreed between the parties that an epidemic or resulting quarantines should be excluded from the definition of force majeure, you might see something like the following:
Definition of Force Majeure: Force majeure for the purposes of this clause means: riot, war, invasion, act of foreign enemies, hostilities (whether war be declared or not), acts of terrorism, civil war, rebellion, revolution, insurrection of military or usurped power, requisition or compulsory acquisition by any governmental or competent authority, radiation or contamination or other hazardous properties of any explosive assembly or nuclear component, earthquakes, flood, fire, disease, or other physical natural disaster, strikes, labor disputes, sit-ins, or industrial disputes, strike or industrial disputes, or direct results of any of the foregoing; but excluding any delays or closures resulting from a public health condition, disease, or similar occurrence.So, what about this clause? Does this language cover the COVID-19 Coronavirus? Because it specifically excludes, by its terms, “public health conditions” and “disease” the answer is no. My Assessment: No “But why would I want to exclude health conditions and epidemics from the definition of Force Majeure?” I don’t know that you necessarily would, but the point is that a skilled attorney can draft this clause to reflect whatever the parties agree is the allocation of risk, from a business perspective. Something that you should think about when it comes to doing business and/or drafting contracts.
Another Quick Side Note: Impossibility & Impracticability
There is another thing to understand in the context of analyzing a force majeure clause. Specifically, the “background” rights of the parties are relevant.
One of the seminal cases of contract law, Taylor vs. Caldwell (from 1863), involved a theater owner who was excused from a contract to provide access to his theater, by reason of his theater having burned down (it was impossible for him to perform).
But, how this doctrine would apply to particular circumstances is also less clear. It’s always a better practice to address in your contract exactly how you would like for an unforeseen circumstance to affect your contract (and which circumstances would be treated differently than others, if any).