Coronavirus and Commercial Contracts

The coronavirus (COVID-19) pandemic has created an unprecedented amount of uncertainty in every business sector and industry around the world. Chances are that your business has contracts that have been or may be affected by the pandemic. Many questions from our clients concern whether the COVID-19 pandemic constitutes a force majeure event and excuses performance under a contract.

What is force majeure?

Force Majeure – An Act of God. Force majeure, French for greater force, describes any event that is unexpected by all parties, not caused by any party, and affects the relationship between them, limits the ability of either to perform a duty, or requires one to intrude on a privilege of the other.

Bouvier Law Dictionary

Tennessee courts have defined an “Act of God” as follows:

Any misadventure or casualty is said to be caused by “Act of God” when it happens by the direct, immediate and exclusive operation of the forces of nature, uncontrolled or uninfluenced by power of man and without human intervention, and it must be of such character that it could not have been prevented or escaped from by any amount of foresight or prudence, or by the aid of any appliances which the situation of the party might reasonably require him to use.

Butts v. City of South Fulton, 565 S.W.2d 879, 882 (Tenn. Ct. App. 1977).

This is essentially a reasonableness standard: Is the event too remote and so unforeseeable to be beyond a requirement to impose contractual liability? At this point, we do not know to what extent courts will interpret the COVID-19 pandemic as a force majeure event. However, given the increasing gravity of the growing pandemic, I think it is nearly certain that COVID-19 will constitute a force majeure event.

Does your contract contain a force majeure clause?

Force majeure clauses are common in a variety of commercial contracts. Often considered boilerplate language (and not usually heavily negotiated) many businesses have entered into contracts giving little thought to the force majeure clause. A force majeure clause will set forth a series of circumstances that will excuse a party’s performance for actions or events beyond its control. The following is a typical example of a force majeure clause:

Neither Party will be held liable for failure to fulfill its obligations hereunder if such failure is due to a Force Majeure Event. A “Force Majeure Event” means, but is not limited to, an act of war; domestic and/or international terrorism; civil riots or rebellions; quarantines, embargoes and other similar unusual governmental actions; or extraordinary elements of nature or acts of God; provided that such Force Majeure Event is beyond the excused Party’s reasonable control, occurs without the excused Party’s fault or negligence, is not caused directly or indirectly by the excused Party and could not have been prevented or avoided by the excused Party’s reasonable diligence.

The example above specifically includes “quarantines” and “extraordinary elements of nature or acts of God”, which would likely cover the COVID-19 pandemic. Some clauses may specifically define “pandemic” as a force majeure event. Every contract is different, and specific language of the contract’s force majeure clause will, of course, govern and control whether COVID-19 excuses performance of contractual obligations under the circumstances of your situation.

What if your contract does not have a force majeure clause?

If the contract does not have a force majeure clause, there still may be some legal concepts that may excuse performance, such as the doctrines of impracticability or impossibility.

Tennessee courts have found that failure to perform a contract is excused if performance becomes impossible due to a cause not attributable to the non-performing party and the impossibility is “not among the probable contingencies which a man of ordinary prudence should have foreseen and provided for.” Wilson v. Page, 325 S.W.2d 294, 298 (Tenn. Ct. App. 1958). This is a reasonableness standard that courts will follow similar to the analysis in interpreting a force majeure clause.

I predict that force majeure clauses will be the battlegrounds for commercial litigation in the months and years ahead. Given the extraordinary and severe losses being suffered by businesses, small and large, contractual disputes over these clauses will be inevitable. These disputes will range from business interruption claims between businesses and their insurance carriers to construction contracts to convention and hotel agreements to various supply chain contracts.

Do you have questions regarding a commercial contract affected by the coronavirus (COVID-19) pandemic? Please contact me. We are regularly called upon to prepare, review, negotiate, and litigate a variety of commercial contracts. We are here to help navigate your business through these turbulent times.