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Contracts and the Coronavirus

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How the Coronavirus may trigger clauses in your contracts

It is early days in the global pandemic known as the Coronavirus. That quarantining society is wreaking havoc on businesses throughout the US and the world is an understatement.  What it will mean for each business and its contracts will likely be sorted out in the years to come by the courts.  However, I suspect many people will find resolution directly, as few have the time or resources to wait years for a contract lawsuit. But if you find yourself in contracts that are impossible for you to continue to perform, there are two common clauses to look for that may allow you to suspend your obligations under the contract.

The key clauses that are often included in business contracts and insurance policies address “force majeure” and “natural disasters”.

Force Majeure 

This concept has been around since the beginning of contract law. It translates roughly to superior strength.  It is in simplest terms that an unforeseen event has occurred, that is outside of either party’s control, that makes performance of the contract if not impossible, then impracticable on one or both of the parties.   It also needs to be an event that the parties did not contemplate when they entered into the contract. It is an external event that is unforeseeable and unavoidable.

Common examples that allow a party to invoke a force majeure clause to excuse or suspend their performance under their contract are wars, plague, crime, riots, strikes, revolutions and natural disasters.

In other words, a superior force has impacted the contract such that the party can’t perform or can’t perform in a timely manner.  It’s not a free pass and all parties have a duty to mitigate damages, which is why most parties will resolve their differences short of court.

Natural Disaster

This concept has usually been applied to hurricanes, floods, earthquakes, etc.  It’s also called Acts of God clause.  If the Coronavirus is indeed a virus born of animals that has now infected people, then it seems a plausible argument that it is a natural disaster.  Generally, illness is not something categorized as a natural disaster, but when you have one that becomes a global pandemic that is created out of nature, it seems a reasonable argument, especially as the amount of time increases its financial impact. Normally the definition of a “natural disaster” will become part of your Force Majeure clause, but sometimes it is separated.

Thus, if you have a business contract that has become impossible or near impossible to perform, it is worth looking at your contract for these clauses. Each one will be drafted differently. It is also possible if your contract is silent on force majeure or a natural disaster being an excuse for non-performance or delay in performance that the state of your contract’s governing law will imply one.

Insurance policies may also provide coverage for such an event or their carve outs for “natural disasters” may not include language that seems to cover the Coronavirus.

While the idea of an act of God occurring and frustrating your ability to perform your obligations of a contract are simple, it is advisable that you obtain legal advice to help guide you with the interpretation of your clauses and the body of case law that has ruled in your state on the subject.  But a funny French term will likely be the saving grace for more than a few businesses.

Disclaimer – This article is for information purposes only. It is not intended to provide legal advice to anyone. If you require advice, you should reach out to our firm or another lawfirm to discuss your facts and circumstances to obtain legal advice.

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Meet Margaret Tritch Buonocore

Margaret Tritch Buonocore began her legal career in Los Angeles as a litigator. She then moved to London where, after completing her LLM, she worked in international business and finance for almost a decade structuring corporate finance transactions, equity offerings, debt, and derivative instruments focusing on contract and securities law issues. Learn More…

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