Some years ago, we advised about the importance of properly documenting your agreement through a written contract and the importance of proper due diligence. See Handshake Deals and Written Contracts. Given the current unprecedented events with the virus spread worldwide, the importance of properly written contracts is bound to be critical in the future months and years, as disputes over contractual performance flood the courts. Indeed, it will likely be a new test for the courts, which are already overburdened with cases.
Among the issues shall be what contractual obligations exist under the circumstances and whether contractual performance can be excused through the application of “force majeure.” Generally speaking, “force majeure” (French for “superior force”) is a contract provision that excuses a party from performing his or her contractual obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible. Here is an example of a force majeure provision:
Except for buyer’s obligations to make payments due for gas delivered under this agreement, neither party shall be liable for failure to perform this agreement when such failure is due to “force majeure.” “Force majeure” shall mean acts of God, strikes, lockouts, or industrial disputes or disturbances, civil disturbances, arrests and restraints, interruptions by government or court orders, present and future valid orders of any regulatory body having proper jurisdiction, acts of the public enemy, wars, riots, insurrections, inability to secure labor or inability to secure materials, including inability to secure materials by reason of allocations promulgated by authorized governmental agencies, epidemics, fires, explosions, breakage or accident to machinery or lines of pipe, freezing of wells or pipelines, inability to obtain easements, right-of-way, or other interests in realty, the making of repairs, replacements, or alterations to lines of pipe or plants, partial or entire failure of gas supply or demand over which neither seller nor buyer have control, or any other cause, whether of the kind here enumerated or otherwise, not reasonably within the control of the party claiming “force majeure.” Events of “force majeure” shall, so far as possible, be remedied with all reasonable dispatch. The settlement of industrial difficulties shall be within the discretion of the party having the difficulty, and the requirement that “forcemajeure” be remedied with all reasonable dispatch shall not require the settlement of industrial difficulties by acceding to the demands of any opposing party when such course is inadvisable in the discretion of the party having the difficulty.
In situations where such contractual provisions already exist in a given contract, the litigation over whether or not the coronavirus pandemic constitutes “force majeure” will depend on the application of the language of the contract and the circumstances surrounding the alleged contractual breach. But what will happen in cases where the contract is ambiguous in this regard? Indeed, and unfortunately, many people enter into agreements on their own — on “handshake deals” or “back of the napkin” one-pagers that do not take into account such issues as “force majeure,” which many business people, even sophisticated ones, view as unnecessary “legalese”. Such cases will be a test for courts and there are other doctrines that could apply (such as impracticality for example (“Under the common law of contract, impracticability is a defense that can be relied on when the duty to be performed becomes unfeasibly difficult or expensive for a party who was to perform. The doctrine of impracticability arises out of the occurrence of a condition which prevents him/her from fulfilling the contract.”)
In current times, business owners are advised to think about these issues and analyze their litigation risk exposure, before it happens. And it is bound to happen. One conversation with a business owner today is indicative — no one will be paying anyone now. I hope this is not true, but at least its one perspective from a person that is fairly sophisticated and operating business at a high level. See also Due Diligence and Managing Litigation Risk
This is just a cursory identification of the issue and problems. Each situation and contract is unique — but businesses are strongly advised to consider these issues now, in order to both mitigate litigation risk and protect their business bottom line by anticipating legal issues before they arise.