Coronavirus and Broken Contracts

Coronavirus (COVID-19) has left a trail of thousands of broken contracts in its wake in a wide range of industries. From event cancellations, to broken supply chains, Coronavirus has already caused millions of dollars in commercial losses and business interruption. Continued travel restrictions, event cancellations, school and business closures, quarantines, supply-chain disruptions, cash flow problems, and worker shortages is expected to increase over the coming months. This in turn has left businesses wondering—who is liable for the disruption?

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 some unforeseen  circumstances preventing a party’s performance of the contract (i.e., an act of God, such as hurricanes, war, earthquakes, etc.). The doctrine is also commonly referenced as “impossibility of performance.”

Photo Credit: CDC/Alissa Eckert, MS, Dan Higgins, MAM

The concept of force majeure (French for “superior force”) 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, and by a cause of a superior force or of a fortuitous occurrence.

For most businesses, coronavirus is an unforeseen circumstance out of their control, however, the application of force majeure to any particular contract must be done applying the law of the relevant jurisdiction.

California law recognizes that parties may not be held liable when unforeseen circumstances prevent them from fulfilling their contractual obligations, whether or not the contract has a force majeure clause. The leading Supreme Court case in California 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.

For its part, the State of California defines force majeure in its standard Judicial Council contracts a “a delay which impacts the timely performance of work 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 epidemic would render this provision operable.

Many contracts, however, 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 fall out from the current crisis. The bottom line is that businesses have options to escape ruinous consequences caused by circumstances  beyond their control. Companies should seek legal counsel to navigate the ongoing effects of Coronavirus.