COVID-19 is dramatically affecting businesses. Among the many questions that business leaders are asking are those related to contracts, such as the following:
Do I still have to perform under a contract during the COVID-19 pandemic?
Typically, no party to a contract can simply decide to stop performing under a contract, even during difficult times. The determination of whether a party can delay, or halt, performance entirely depends on the language in the contract itself. While language permitting unilateral termination does exist in many types of contracts (usually with a notice period of about 30 days or so), it is not very common. More often, the determination comes down to the existence of a “force majeure” provision, which discusses contract performance in the wake of “force majeure event.”
What is a “force majeure event”?
Generally a “force majeure event” is an event outside of the control of the parties to the control. Common examples inserted into these types of provisions include labor disturbances (and the like), governmental action prohibiting certain actions, acts of war, action of the elements, and the always popular “act of God.” The question of whether a situation qualifies as a force majeure event depends entirely on the language in the force majeure provision. Considering the current coronavirus pandemic, the inclusion of disease in the definition would certainly qualify as would the inclusion of an “act of God.”
What protection does typical force majeure language afford me in a contract?
The protections granted depend on the terms of the force majeure provision. Quite often such a provision allows for a delay in performance for a specific period of time if the delayed party provides notice and an explanation for the delay and how the delay qualifies as a force majeure event. If the delay lasts beyond certain time period, the language may even allow for termination of the agreement, subject to the payment for services already rendered of course. The key to any protection under a force majeure provision is whether the delay or inability to perform is tied to a force majeure event. Under the current situation, one would have to determine if the inability to perform is directly tied to the COVID-19 outbreak—whether it be the coronavirus itself or another “force majeure” event directly tied to the outbreak.
What happens if I stop performing under a contract based on a claim that an event qualifies as a force majeure and a court or arbitrator determines that the event does not qualify as a force majeure event, regardless of whether COVID-19 qualifies as a force majeure event or the lack of other language permitting termination?
If a party stops performing under a contact without justification then the breaching party can be liable for damages under the contract and other remedies allowed by law.
Should I address the COVID-19 Pandemic in contracts going forward?
Absolutely. Now that the COVID-19 Pandemic is upon us, it is incumbent to be addressed in contracts that you may be considering. While COVID-19 is an act of God, its devastating effects are now known and need to be acknowledged and addressed in future contracts. How that is best done depends on the particular circumstances of the contract.
For more information, contact Sam Laurin.