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Contractual Implications of COVID-19 

by Travis A. Knobbe

Published: March, 2020

Submission: March, 2020

 



At Spilman, we are often asked to review the "colder" legal aspects of human events of all types. The COVID-19 pandemic will be no different. To get a jump start on some of the questions we have faced or will face, we offer some thoughts on the contractual implications of COVID-19.


Over the past week, Americans have witnessed countless unprecedented responses to the COVID-19 pandemic. The NBA postponed its season. The NHL soon followed. The NCAA cancelled all winter and spring sports, including March Madness. Cruise lines shut down. Schools shut down. Disney shut down its parks. National conferences have been postponed or cancelled. On a smaller scale, we hear more frequent reports of local conferences and events, from business gatherings to weddings and birthday parties, being cancelled.


We offer no perspective on whether the responses to COVID-19 are justified or not except to say the theory behind cancellation of events and social gatherings is simple. After the World Health Organization declared COVID-19 a pandemic, two things became clear. First, if responsible parties did not take measures to increase social distancing, then the upward curve representing the number of known infections would continue to rise dramatically. Second, in light of that, those who play host to larger social gatherings might ultimately get unfavorable publicity and perhaps even face legal liability if the novel coronavirus that causes COVID-19 spread through those events.


As a result, whether the sponsors of such events decided to simply act as good corporate citizens or to avoid the potential bad press or legal repercussions, many companies have sacrificed much revenue to play their part. Some companies, however, with less capital to absorb some of the natural consequences of large-scale cancellations face tougher decisions. The problem is not just loss of revenue. Instead, these companies face very real questions of how they can possibly keep up with their ongoing obligations if they have to close their doors or cancel events.


From a contract perspective, however, companies can take steps to minimize their exposure to contractual obligations. Indeed, many standard commercial contracts contain "force majeure" clauses. Reviewers, drafters, and contracting parties often overlook them because nobody really wants to consider the worst-case scenarios when entering into relationships with one another. Nonetheless, lawyers often tuck these away into fine print.


In standard commercial contracts, such provision is usually towards the end of a contract. The provision often defines in broad categories the types of events considered to trigger the clause, called a force majeure event. Terrorist acts, global wars, and catastrophic natural disasters all fit squarely within the concept. Sometimes, these contracts specifically include large-scale infectious diseases within their purview. Thus, whether a pandemic triggers application of the clause depends almost entirely on how broad or narrow the provision reads.


The consequences of these provisions also varies by contract. Sometimes, the provision excuses performance for only so long as the force majeure event lingers. Other times, the provisions allows for outright termination of mutual obligations. The legal consequence will, as a result, be heavily dependent on the precise language of the contract. Businesses should closely consult this language when deciding whether to terminate and cancel or simply delay and suspend.


Some contracts, however, offer no mention of the concept of force majeure. The law generally will not imply the existence of such provision either. In this event, a business may need to rely upon the doctrine of "commercial impossibility" as an escape hatch. The doctrine's reach varies from state to state and court to court. That said, most iterations of the doctrine specify its application is highly dependent on the facts and circumstances unique to the parties, the specific relationship, and the intersection between that specific relationship and the external events believed to render performance impossible. The entity operating a cruise ship that has a contractual obligation to port at a particular location for specific durations and at specific intervals has a very good "commercial impossibility" argument to forgive its inability to perform in light of a pandemic. A party that has an obligation to deliver all hand sanitizer it produces to Kroger at a fixed price, however, likely cannot avail itself of this concept.


Companies currently facing difficult decisions in light of the pandemic should certainly reach out to counsel to determine what legal exposure they might ultimately face if they suspend or terminate certain functions. Understanding the eventual legal consequence - and what it might require to get there - can help ease at least one factor in that decision-making process. Armed with that knowledge, businesses might also be more proactive and negotiate fair resolutions with contractual counterparties in advance. Those resolutions, of course, would require their own specific language with carefully crafted release provisions. The converse is also true. Counterparties who might also be affected by these decisions will need to understand their rights to best protect their interests, too.


Here at Spilman, we are ready and willing to help you consider your options in these unprecedented times. Contact Travis Knobbe with any questions or to enlist Spilman's assistance in advancing or protecting your interests.
 


 



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