Did Your Contract Catch COVID-19?

Cyrus Chin, Vickie Wang

March 13, 2020

COVID-19 disease, commonly known as coronavirus, has swept the globe in recent weeks, with the World Health Organization officially declaring the virus a pandemic on March 11, 2020. This announcement, coupled with the rapid spread of the virus, has led to major political and economic ramifications. In light of this, you should take a close look at your contracts to see how COVID-19 will affect your business.

Contract Problems

“Force Majeure” is a term of art that refers to certain unforeseen events. When a Force Majeure event happens, a party’s performance obligations could be suspended and nonperformance during the Force Majeure event might not trigger a breach of the contract. Such events could range from acts of governmental entities, strikes and labor disputes, civil commotion, terrorist attacks, war  – almost any event that could prevent performance under a contract could be designated as a “Force Majeure”. “Acts of God” disturbances, such as natural disasters in the form of hurricanes and tornadoes, are also often covered in typical provisions. However, natural consequences of external forces, such as heavy rain during an outdoor event, are usually not covered under a Force Majeure clause.

Force Majeure clauses must be expressly provided for in order to be invoked and are specific to each contract. When included, these clauses are a form of risk allocation between parties and allow for proactive planning in case such events do happen and interfere with performance of the agreement. Of course, in order for Force Majeure to apply, the event that occurs must fall within the scope of the clause in the contract. In the case of COVID-19 or other public health emergencies, some contracts allow the clause to trigger as soon as the transaction is impacted, while others require a formal designation from the World Health Organization. Still other contracts require an express reference to a “pandemic.” In most cases, the Force Majeure clause will require some form of notice to the other party, and failing to do so in a timely manner could result in a waiver of a party’s rights under that clause.

Typically, courts have interpreted Force Majeure clauses narrowly, which means that if the event is not expressly defined as a Force Majeure in the contract, you will not be able to invoke the Force Majeure clause. For example, courts have rejected applying Force Majeure clauses for events such as the September 11 terrorist attack and union strikes if they were not specified in the contract, even though those events negatively impacted the performance of contracts.

Does Your Insurance Protect You?

At the same time, you should examine whether your insurance covers the impact of COVID-19. If you are experiencing business income losses as a result of COVID-19 at an insured location, those losses might be covered under Business Interruption insurance. You should determine if your Business Interruption policy is triggered by indirect damage to your business from COVID-19.  Supply Chain Insurance is also particularly relevant here because it would protect against losses that occur due to disruptions in a business’s supply chain and indirect losses or damages that stem from that disruption.

While most people do not think twice about the Force Majeure clause in their contracts, the outbreak of  COVID-19 serves as a reminder that every clause in your contracts should be drafted thoughtfully and carefully. With the rapid changes occurring daily with COVID-19, make sure to monitor the ongoing situation and take appropriate precautions to protect both yourself and your business.