Coronavirus & Contracts: How the Coronavirus May Trigger Force Majeure

I. FORCE MAJEURE IN CONTRACTS

When drafting contracts, lawyers must consider potential scenarios that could render the execution of a contract impracticable. As a default, contract law principles provide protections to all parties in the face of certain events, such as the death of a person, or the destruction of an item, necessary for performance of the contract obligation. ² Even with baseline protections, force majeure clauses allow parties to shape the contours of their relationship and allocate risk in the face of unforeseeable events which make fulfilling the contract impossible. In some cases, force majeure clauses are meant to insure against scenarios that are easy to predict yet out of any party's control. However, lawyers who draft force majeure clauses also must anticipate harder-to-predict, unforeseeable events—such as war, natural disasters, epidemics, strikes, and terrorism—which impact a party's ability to fulfill its obligations. ³ Simply put, force majeure provisions enumerate circumstances whose occurrence excuse a party's performance of its obligations under the contract. ⁴

Even in the absence of force majeure clauses, contract law provides certain default protections. The doctrine of impracticability, for instance, is a contract law principle which states that where a “party's performance is made impracticable without his fault by the occurrence of an event…his duty to render that performance is discharged, unless the language or circumstances indicate the contrary.” ⁵ Generally, the doctrine is applied narrowly, only excusing performance of an obligation under circumstances which were so unlikely to occur that the parties to the agreement would not consider protecting against them during drafting of the contract. ⁶ Moreover, while the definition of “impracticable” is somewhat elusive, the doctrine is not confined to instances in which performance is absolutely impossible. ⁷ Rather the doctrine applies in circumstances where continued performance of the contract would be somewhere between impossible and impractical. ⁸ In the absence of a force majeure clause, parties to a contract may have to rely on the doctrine of impracticability, amongst other contract law principles.

Nevertheless, even with the default protection of contract law principles, lawyers routinely draft force majeure provisions into contracts. The existence of a force majeure provision generally supersedes the doctrine of impracticability, allowing all parties to the agreement to negotiate and delineate circumstances which would excuse performance. ⁹ While this may seem like a fairly boiler-plate provision, failure to draft the force majeure clause to the context of the agreement may result in parties not receiving the level of risk protection they hoped for. ¹⁰ This is why it is unclear if the Coronavirus triggers force majeure clauses (it may or it may not). ¹¹

Given that the force majeure provision is part of the contractual agreement, any dispute regarding the force majeure provisions will be resolved through the interpretation of the contract. ¹² Since contract interpretation is a matter of state law, the results of any dispute over the applicability of force majeure clauses will be uncertain, as results will vary based on jurisdiction. ¹³ In many jurisdictions, courts tend to interpret force majeure clauses strictly and quite narrowly. ¹⁴ Thus, whether a force majeure clause can be triggered will depend on how specifically the provision has been drafted. For example, if a force majeure clause is drafted too narrowly and only makes references to exclusive events, then a court may find that the clause is an exhaustive list. ¹⁵ On the other hand, if the clause is drafted more broadly, then a court may compare the Coronavirus with the types of events described in the clause to determine if the Coronavirus falls within its scope. ¹⁶

II. THE CORONAVIRUS

Tracing the timeline of the Coronavirus helps illustrate the reason for its far-reaching effect on contractual agreements. On New Year's Eve, 2019, the Peoples Republic of China reported several cases of individuals in Wuhan exhibiting “unusual pneumonia” to the World Health Organization (“WHO”). ¹⁷ After nearly a week of testing and assessment, the WHO identified the disease as Coronavirus Disease 2019 (COVID-19), a novel strand of a broader coronavirus family which includes viruses ranging from the common cold to Severe Acute Respiratory Syndrome (SARS). ¹⁸ By the end of January, the virus spread to India and the Philippines, and the death toll of the virus had reached nearly 170. ¹⁹ Fast-forward a month, by the end of February 2020 there were nearly 80,000 confirmed cases of Coronavirus and nearly 2,800 deaths world-wide. ²⁰ In a matter of weeks, the Coronavirus went from being a ‘global health emergency’ to a ‘pandemic’. ²¹

In response to the rapid spread of the Coronavirus and subsequent global panic, companies, institutions, and countries began canceling major public events and gatherings. Given that the Coronavirus is a respiratory illness that spreads through droplets from sneezes and coughs, event organizers began considering the ramifications of large gatherings which could become opportunities for the virus to further spread. ²² In Austin, Texas, organizers cancelled the South by Southwest festival. ²³ In Tucson, Arizona the Tucson Book Festival, one of the largest in the country, was cancelled. ²⁴

In addition to events being cancelled, companies which rely heavily on upstream suppliers have been hurt by supply-chain disruptions caused by the Coronavirus. In an effort to contain the Coronavirus and stop its rapid spread, China shutdown many factories causing delays to downstream consumers. ²⁵ Subsequently, companies in the United States such as Apple have experienced production shortages. ²⁶ Apple, for example, currently faces substantial shortages in components necessary to make the newest unreleased iPhone. ²⁷ While it is practically impossible to see the contracts written for these relationships effected by the Coronavirus, it is very likely that force majeure clauses are implicated and help dictate which party bears the cost of cancellations or shortages.

III. WHAT THIS MEANS

In instances when an event organizer has to cancel an event and thus cancel a contract with a vendor and a service supplier, or when a factory has to stop supplying parts to a manufacturer, parties will have to look at the specific language of the force majeure clause to determine whether the Coronavirus—or the threat of spreading the Coronavirus virus—contractually excuses a party's nonperformance of their obligations. Given that courts tend to construe force majeure clauses narrowly, parties hoping to invoke protections under the force majeure clause will likely have to show the existence of two conditions. First, the Coronavirus will have to fall within the scope of the force majeure clause. ²⁸ This can be either through an explicit reference to ‘epidemics’ (or some variation of ‘epidemics’) or through an implicit reference via a catch-all provision in the force majeure clause. ²⁹

Second, the party invoking the force majeure clause will have to show a causal link between the Coronavirus and that party's non-performance of their obligation. ³⁰ Simply put, that party will have to show that the Coronavirus, and not some other circumstance, made performance of their obligation impossible. ³¹ Courts in the past have noted that unless a force majeure clause explicitly brings economic downturn within its scope, relying on economic downturn alone is not sufficient to trigger its protections. ³² Rather, there needs to be some truly unforeseeable underlying circumstance within the scope of the force majeure clause, leading to a substantial change in market conditions for economic downturn to excuse performance. ³³

However, even if a party were to meet these two conditions, a court may still find that a force majeure clause was not triggered. In the face of global panic, the underlying principle of force majeure remains—performance of the obligations must be sufficiently impossible to warrant relief. Parties may face an uphill battle if precautionary measures alone are the basis for invoking the force majeure clause. Ultimately, parties to a contract will rely on good drafting, contract law principles, and diligent lawyers to help them weather the storm and manage the risk associated with the Coronavirus pandemic.