Across the United States, large public gatherings have been canceled, or even banned, in the wake of the rapidly spreading Coronavirus, or COVID-19. As a result, consumers are re-thinking their travel plans, and businesses are being forced to cancel long-planned meetings and conventions. Unless refunds are issued, countless people are now stuck with costly, yet unusable, tickets, and reservations. In addition to these disappointed consumers, business owners too must face the detrimental economic consequences and the potential disruptions in business wrought by the Coronavirus, ranging from worker shortages to transportation disruptions, to the closure of production plants and ports of entry, and bans on travel and mandated quarantines.
Because it is unknown how long the Coronavirus will continue to be a threat, business owners have critical decisions to make in the days and weeks to come. Chiefly, under these unusual circumstances, businesses should begin to engage in careful analysis to determine if the Coronavirus might trigger the force majeure clause in any of their existing business contracts.
Force Majeure Clauses
Companies often allocate risk through their contracts and insurance policies. Force majeure is a common contract provision that allows a company’s performance under a contract to be suspended or excused when unanticipated and uncontrollable business interruptions occur. Typically, these provisions cover “acts of God” but can also include unforeseeable acts of man (i.e. theft, vandalism, war). An “act of God” is a natural event, such as a flood, which is so extraordinary that past occurrences and conditions provided no reasonable warning of the event.[1] But does the global outbreak of a novel virus, like the Coronavirus, constitute a “force majeure” event or otherwise excuse performance from a contract?
Does the Force Majeure Clause in Your Contract Cover the Coronavirus Outbreak?
Unfortunately, Virginia law is slim on the subject of force majeure. However, case law from courts across the country suggests that whether the Coronavirus constitutes a force majeure will depend on the language of the contract. Sometimes a contract will include language that specifically addresses pandemic outbreaks, but, more commonly, the contract will not address this type of situation. Thus, in the event of a dispute, the applicability of a force majeure clause will most likely depend on the interpretation of a court of the particular language, facts, and circumstances.
A few judicial opinions from Iowa and Indiana have analyzed whether a certain disease outbreak constituted a force majeure event, and, in those cases, generally, the court’s focus centered on the extent to which the outbreak was an unforeseeable event triggering a dramatic change in market conditions.[2]
While in a different context, the Fourth Circuit provided some general guidance on force majeure clauses in Langham-Hill Petroleum, Inc. v. S. Fuels Co. [3] In that case, the buyer attempted to invoke the force majeure clause as a result of the price for fuel oil collapsing as Saudi Arabia attempted to regain its share of the world oil market in the 1980s. The court found that characterizing “price fluctuations” as an event outside of the party’s control would defeat the entire purpose of a fixed-price contract because a change in market price is a normal risk of a fixed-price contract. This case suggests that under the Fourth Circuit, a force majeure clause is most likely to relieve a party of its contractual obligations in the context of the Coronavirus outbreak when the party can show that: 1.) it was an unforeseeable event; 2.) it triggered a “dramatic change in market conditions” not simply related to “market price fluctuations” or other normal risks of a contract.
Additionally, the fact that 61 countries (as of March 13, 2020) have reported cases of the Coronavirus to the World Health Organization distinguishes this situation from other epidemics.[4] As a result, courts in the United States may be more willing to find that both the outbreak and governmental responses were unforeseeable and beyond the control of either party. Notably, this is only the sixth time that the WHO has declared a disease outbreak to be a Public Health Emergency of International Concern (PHEIC) since being vested with that authority in 2005.[5]
What Can You Do Next?
Regardless of whether a contract includes a force majeure clause, as a matter of good business companies should reach out directly to customers, suppliers, and employees to explain and discuss any delays or other potential problems and attempt to work things out amicably. This will ensure everyone is on the same page and provide a proactive approach during a period of uncertainty. In addition to effective communication, here are a few other considerations for businesses/business owners:
- Monitor the situation. The current situation is fluid. While conditions today may or may not allow for the invocation of a force majeure clause, depending on where you are located, if the crisis worsens and additional U.S. government or WHO declarations add significant restrictions on travel or force event cancellations, it’s more likely a force majeure invocation would relieve or alter a party’s contractual obligations. Consideration should also be given to whether various states have declared states of emergency tied to health conditions or imposed their own restrictions on travel or public gatherings to prevent the potential spread of any communicable virus.[6]
- Consider Business Solutions to Legal Problems. Think practically and consider whether there are alternative means to perform your contractual obligations. Realize the other party to the contract may be amendable and willing to adjust performance obligations in order to mitigate their own risks. Consider drafting a mutual agreement to move the event to a time after the crisis is over. Both parties likely want to encourage full performance (and maximum attendance) so sitting back down at the bargaining table to negotiate a compromise often leads to the best results.[7]
- Seek Counsel. Each contractual clause governing performance is unique and can be interpreted differently depending on the particular facts, circumstances, and law that governs, so it is important to discuss your situation with a business attorney before seeking to enforce and/or excuse performance. Also, be mindful of any notice provisions under the contract as well as specific additional obligations you have to either compel performance or mitigate damages should the virus interfere with your business expectancy.[8]
Should you need assistance in proactive crisis planning for the future, enforcing or excusing contract performance under a current force majeure provision, and/or potential related commercial litigation, the business attorneys and litigation lawyers at Davis Law, PLC stand ready to assist you.
[1] See Dir.-General of R.Rs. v. Bryant’s Adm’r., 127 Va. 651, 105 S.E. 389 (1920).
[2] See SNB Farms, Inc. v. Swift & Co., Nos. C01-2077, C01-2078, C01-2080, 2003 U.S. Dist. LEXIS 2063 (N.D. Iowa Feb. 7, 2003); see also Rexing Quality Eggs v. Rembrandt Enters., 360 F. Supp. 3d 817 (S.D. Ind. 2018).
[3] Langham-Hill Petroleum, Inc. v. S. Fuels Co., 813 F.2d 1327 (4th Cir. 1987).
[4] https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—2-march-2020 (WHO Director-General’s Opening Remarks at Media Briefing on COFID-19, March 2, 2020).
[5] https://www.seyfarth.com/news-insights/managing-project-risk-associated-with-the-coronavirus-outbreak-through-force-majeure-provisions.html#_ftn12
[6] See https://www.gtlaw.com/en/insights/2020/3/coronavirus-and-force-majeure-contract-clauses
[7] Id.
[8] Id.