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How Will Coronavirus Affect Contractual Relationships and Obligations?

The coronavirus pandemic has disrupted practically every aspect of American life. Whether closed by government order or public safety concerns, millions of businesses around the country have come to a screeching halt. Despite the overwhelming effect of COVID-19, an “Act of God” clause in a business contract may not let a party ignore its contractual obligations.

Many contracts include force majeure (“Act of God”) clauses, which excuses a party’s contract performance prevented by a disastrous outside event, like earthquakes, tornados, hurricanes and wars. If you want to rely on this type of provision to justify nonperformance or if a counterparty to an agreement invokes a COVID-19-related Act of God clause against you, we suggest you consider the following factors:

  • Terms of the agreement — It’s critical to read the contract to see if it specifically or generally mentions a pandemic as an event affecting the parties’ rights. For example, the collective bargaining agreement between the NBA and its players’ union specifically refers to “epidemics” as a force majeure event that lets the league’s owners withhold salary and potentially revoke the entire agreement.
  • Impossibility vs. difficulty — Parties enter into contracts to allocate business risks. Many unexpected events can affect the feasibility of meeting one’s contractual obligations – like price changes, shortages and/or changes in technology. However, the fact that something becomes more difficult, economically impractical or even dangerous may not justify using an Act of God exception. In a relatively recent case involving a highly contagious disease, Morocco could not invoke force majeure to escape liability after it canceled a 2015 soccer tournament while the Ebola virus afflicted West Africa. Though holding the tournament might have been unwise and costly, the Court of Arbitration for Sport ruled that it was not impossible.
  • Foreseeability — Another consideration when a party claims an Act of God to avoid performance is the foreseeability of the event. Courts usually find financial downturns (even severe ones), shipping problems, material shortages, price fluctuations and other events affecting contract fulfillment foreseeable. Some agreements specifically exclude common problems that might lead a contract partner to invoke a force majeure clause.

The unique nature of the COVID-19 pandemic has thrust all of America into uncertainty. Courts usually try to uphold business contracts, so using force majeure language to excuse your legal duties can prove difficult, even if you have a compelling case. Promptly communicating with contract partners might provide a better solution, which acknowledges the harm and modifies certain rights and obligations. Working with a skillful, creative business lawyer may help you avoid an expensive, serious conflict over how force majeure applies. If consensus cannot be reached, your attorney can advise whether you might succeed in a legal action.

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Schwartz & Kanyock, LLC counsels business clients on various legal concerns. Please contact the firm online to make an appointment for a consultation.

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