Contractual Implications of COVID-19
March 16, 2020
At Spilman, we are often asked to review the "colder" legal aspects of human events of all types. The COVID-19 pandemic will be no different. To get a jump start on some of the questions we have faced or will face, our COVID-19 Task Force offers some thoughts on the contractual implications of COVID-19.
From a contract perspective, companies can take steps to minimize their exposure to contractual obligations. Indeed, many standard commercial contracts contain "force majeure" clauses. Reviewers, drafters, and contracting parties often overlook them because nobody really wants to consider the worst-case scenarios when entering into relationships with one another. Nonetheless, lawyers often tuck these away into fine print.
In standard commercial contracts, such provision is usually towards the end of a contract. The provision often defines in broad categories the types of events considered to trigger the clause, called a force majeure event. Terrorist acts, global wars, and catastrophic natural disasters all fit squarely within the concept. Sometimes, these contracts specifically include large-scale infectious diseases within their purview. Thus, whether a pandemic triggers application of the clause depends almost entirely on how broad or narrow the provision reads.
The consequences of these provisions also varies by contract. Sometimes, the provision excuses performance for only so long as the force majeure event lingers. Other times, the provisions allows for outright termination of mutual obligations. The legal consequence will, as a result, be heavily dependent on the precise language of the contract. Businesses should closely consult this language when deciding whether to terminate and cancel or simply delay and suspend.
Some contracts, however, offer no mention of the concept of force majeure. The law generally will not imply the existence of such provision either. In this event, a business may need to rely upon the doctrine of "commercial impossibility" as an escape hatch. The doctrine's reach varies from state to state and court to court. That said, most iterations of the doctrine specify its application is highly dependent on the facts and circumstances unique to the parties, the specific relationship, and the intersection between that specific relationship and the external events believed to render performance impossible. The entity operating a cruise ship that has a contractual obligation to port at a particular location for specific durations and at specific intervals has a very good "commercial impossibility" argument to forgive its inability to perform in light of a pandemic. A party that has an obligation to deliver all hand sanitizer it produces to Kroger at a fixed price, however, likely cannot avail itself of this concept.
Companies currently facing difficult decisions in light of the pandemic should certainly reach out to counsel to determine what legal exposure they might ultimately face if they suspend or terminate certain functions. Understanding the eventual legal consequence - and what it might require to get there - can help ease at least one factor in that decision-making process. Armed with that knowledge, businesses might also be more proactive and negotiate fair resolutions with contractual counterparties in advance. Those resolutions, of course, would require their own specific language with carefully crafted release provisions. The converse is also true. Counterparties who might also be affected by these decisions will need to understand their rights to best protect their interests, too.