Coronavirus and Business Contracts: What’s the Law?

By Gordon W. Prince, Esq.

With the unprecedented disruption to business caused by coronavirus, business leaders from the C-suite to the mom-and-pop shop are wondering: How will this affect my business contracts?

Of particular concern: the force majeure clause, which typically excuses a party from contractual obligations due to unforeseen circumstances and events outside the control of the contracting parties.

Force Majeure Clause & Coronavirus

Common force majeure events include floods, fires, earthquakes, wars, invasions, terrorist attacks, and government orders or laws. That certainly is not an exhaustive list of events and there lies the issue. If the outside event impacting the contract is not specified within the force majeure provision, then, generally, the impacted party is not excused from performance and must perform the contract. If the impacted party is unable to perform, it is likely in breach of the contract.

If the contract does not specify events such as “epidemics and quarantines” or “pandemics” in its force majeure clause, a party may have a difficult time claiming they are excused from contractual obligations because the coronavirus has rendered a party unable to perform the contractual duties. Ultimately, it comes down to what the contract says and how a court of law interprets the clause.

State-Mandated Closures

Fortunately, listing pandemics as a qualifying force majeure event in contracts became more frequent after the 2003 outbreak of severe acute respiratory syndrome (SARS). Even if the contract fails to account for pandemics,  recent government actions, including state-mandated closures of certain businesses, may provide a means for a party to have their performance excused. For instance, if the contract lists “government orders” as a force majeure event and one of Governor Tom Wolf’s state-mandated closures of your business renders a party unable to perform under the contract, the performance may be excused.

Understanding Your Contract

Be sure to fully understand what the contract requires to declare a force majeure event. Many force majeure provisions include procedural requirements the claiming party must abide by in order to effectively enforce the provision, including notice requirements. The parties should also seek to understand what performance is actually excused, whether that be the entire contract or only the portions directly related to the coronavirus.

The judicial analysis of the applicability and enforceability of force majeure clauses is made on a case-by-case basis. In the end, the best way to protect yourself is to account for these situations during the drafting stages of the contract.

The business law practice at Gawthrop Greenwood is a mainstay of the firm, serving businesses from startup to Fortune 500 in Pennsylvania, Delaware and beyond. For more information on business and corporate law, contracts, financing and secured transactions, contact attorneys Sandra L. Knapp at sknapp@gawthrop.com, Michael F. Merlie at mmerlie@gawthrop.com or Gordon Prince at gprince@gawthrop.com