Most contracts include force majeure clauses that excuse a nonperforming party when certain circumstances prevent a party from fulfilling its contractual obligation such as “acts of God,” flood, fire, governmental action, riots, labor shortages and disputes, shortages of supplies or materials, and other similar circumstances beyond the reasonable control of the party. In fact, the term “force majeure” translates literally from French as “superior force.” Does your contract have the Coronavirus COVID-19?
These provisions are receiving much attention lately due to outbreak of the coronavirus (COVID-19). The first reported case of the new coronavirus was less than 3 months ago, occurring on December 31, 2019 in Wuhan, China. Nevertheless, the effects of the virus have already slowed down production of goods due labor and supply restraints, interrupted global supply chains, and have prevented or delayed the performance of countless agreements across virtually every industry in most parts of the world. Most people do not understand the coronavirus, and what we as humans do not know, we fear. Fear tends to lead people to make irrational decisions, which, in the business world, means volatility and economic chaos. Just take a trip to your local Costco to see it in real time. In fact, as of the date of this article, the Center for Disease Control states on its website “COVID-19 is a new disease and we are still learning how it spreads, the severity illness it causes, and to what extent it may spread in the United States.” The question is does your contract have the Coronavirus COVID-19?
But is a virus an excuse for nonperformance of a contract? In California, the excuse of impossibility is covered in several code sections:
- “A condition in a contract, the fulfillment of which is impossible or unlawful…, or which is repugnant to the nature of the interest created by the contract, is void.” (Civil Code §1441)
- “The object of a contract must be lawful when the contract is made, and possible and ascertainable by the time the contract is to be performed.” (Civil Code §1596)
- Performance is excused “[w]hen it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States.” (Civil Code §1511(2); see Public Contracts Code §7105(a), (b) infra, §1027).
The law is clear in that the threshold for nonperformance must be more than simply impractical, e.g., financial hardship or inconvenience. The courts have generally taken the position that force majeure clauses are to be interpreted narrowly, and thus careful drafting of these provisions is critical. This means that the event, which the nonperforming party is relying upon, must either be specifically stated or otherwise described in reasonable detail within the context of the force majeure provision. In other words, a carefully drafted force majeure clause will include language referencing an epidemic, pandemic, and plague in order to address health-related issues that may affect the performance of a contract. Does does your contract have the Coronavirus COVID-19?
On March 3, 2020, the Organization for Economic Cooperation and Development stated that if the Coronavirus continues to spread, it could cut the year’s global growth by half, to 1.5% for the year instead of the 2.9% that the Paris-based research group had forecast before the epidemic hit high gear. Since global output was $89.5 trillion last year, $1.5 trillion of economic activity could be lost due to the disease.
We have all heard the clichés of “the best offense is a good defense” and “expect the unexpected,” but they certainly have some truth to them. Risk mitigation is key and simple measures can be taken to help put a company in a stronger position to deal with both the expected and the unexpected. Periodically reviewing business operations and risk management framework, reviewing business contracts (specifically your force majeure provisions), obtaining current product information from all parties in the supply chain, securing alternate supply streams, ascertaining whether employees can work remotely, and obtaining business interruption insurance, if appropriate, can significantly increase a company’s chance of survival in times of uncertainty.
Mr. Malloy is a Senior Attorney at RJS LAW with over 15 years of experience in corporate and business law.
Brian M. Malloy
Corporate & Transactional