Coronavirus and Broken Contracts

The COVID-19 pandemic has left a trail of thousands of broken contracts in its wake, and this has come in a wide range of industries. From event cancelations to broken supply chains, coronavirus has caused millions of dollars in commercial losses and business interruption. Moreover, coronavirus and broken contracts could be a familiar theme in the coming months, as travel restrictions, event postponements, school and business closures, quarantines, supply-chain disruptions, cash flow problems, and worker shortages are expected to increase. This has left many California business owners to wonder: who is liable for the disruption caused by COVID-19? The answer could lie in what is known as the “force majeure” provision found in many contracts.

To learn more about the legal consequences for businesses that are forced to break contracts because of the coronavirus, keep reading.

What Is the Force Majeure Provision in Contract Law?

One provision often contained in comprehensive contracts is that of “force majeure.” Typically, force majeure provisions are included in contracts to excuse a breach if unforeseen circumstances prevent a party’s performance of the contract. This often means an act of God, such as hurricanes, war, earthquakes, etc. The force majeure doctrine is also commonly referenced as “impossibility of performance.”

Force majeure is literally French for “superior force,” and the concept originated in the Napoleonic Code of 1804. The breaching party to an agreement was condemned unless their non-performance or delay in performance resulted from a cause that could not be imputed to them, such as a superior force or a fortuitous occurrence.

What Could Force Majeure Mean for Broken Contracts Caused by COVID-19?

For most businesses, coronavirus is an unforeseen circumstance out of their control. But these cases can still result in litigation because the application of force majeure to any particular contract must be done by applying the law of the relevant jurisdiction. In California, the law recognizes that parties may not be held liable when unforeseen circumstances prevent them from fulfilling their contractual obligations, regardless of whether or not the contract has a force majeure clause. The leading California Supreme Court case defines force majeure as an “insuperable interference” occurring without the party’s intervention that “could not have been prevented by the exercise of prudence, diligence and care.” Insuperable in this context means “impossible to overcome.” Although the case dates back to World War II, it has been cited as recently as 2015 as proper guidance for the interpretation of contracts in California.

Support for this court decision comes from the State of California definition of “force majeure.” In its standard Judicial Council contracts, California defines force majeure as “a delay which impacts the timely performance of work for which neither Contractor nor the State are liable because such delay or failure to perform was unforeseeable and beyond the control of the party.” The standard contract goes on to specifically list “quarantine or epidemic” as such a circumstance. Thus, quarantines resulting from the coronavirus pandemic would render this provision operable and could excuse any California businesses that are forced to break a contract because of COVID-19.

Contact the Los Angeles Business Dispute Lawyers at Tauler Smith LLP

Many contracts do not contain specific language in force majeure provisions. Thus, each contract must be carefully analyzed with the law of the jurisdiction in order for businesses to understand their options. Force majeure is one of many tools that business owners and individuals can use to mitigate the fallout from the current crisis. If you are a business owner who was forced to break a contract due to coronavirus, you have options to escape ruinous consequences.

The Los Angeles business dispute attorneys at Tauler Smith LLP can help you. Call 310-590-3927 or send us an email.