As federal and state governments continue their efforts to contain the spread of the novel coronavirus, COVID-19, businesses are dealing with the economic impact of the global health crisis. Many businesses are having difficulty performing under contracts, due in part to diminished supply chains, insufficient product inventory and massive consumer demands, and cancelled events.
Kelley Drye’s litigation team has considered the contractual disputes that may arise as fallout from COVID-19 and potential remedies. It is critical for businesses and individuals to consider the ability to perform and meet contractual deadlines, and to make “best efforts” to mitigate the impact of COVID-19 on contractual obligations. Although each contract needs to be reviewed on a case-by-case basis, there are common provisions to consider when assessing the impact of COVID-19 on existing contracts. In particular, businesses should identify relevant contractual provisions and consider provisions and concepts such as:
- Force Majeure
- Material adverse changes/events
- Best effort clauses
- Frustration of purpose clauses
- Grace periods for delay
- Termination and default provisions
- Dispute resolution provisions dealing with termination or default
- Notice requirements for any excuse for delay or breach
Force majeure, or “superior force” contract clauses are likely the most relevant here, and depending on the breadth of the clause, a potential avenue to excuse a delay or breach of contract. A force majeure clause may excuse a party from contractual obligations upon the occurrence of unanticipated events, outside either party’s control. It may be possible to broadly consider a force majeure clause, including events such as a government state of emergency, a pandemic or epidemic, or a travel ban. It is important to review these clauses in detail and determine whether any listed events can be broadly construed to include COVID-19.
However, if a force majeure clause explicitly lists qualifying events, some states may interpret the clause narrowly. In New York, for example, parties may not be able to rely on a force majeure clause for an event outside the stated examples, unless it is an event of the “same kind or nature as the particular matters mentioned.” (Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 903 (N.Y. 1987)). Further, the precipitating event must actually “prevent a party’s performance” for the party to be excused under force majeure. (Kel Kim Corp., 70 N.Y.2d at 903). Many contracts include specific events such as war, floods, earthquakes, riots, and epidemics. Others may be broader, including things like a state of emergency or travel ban.
Whether a party can rely on a force majeure clause to excuse breach of contract depends on the specific language of the relevant contract, the governing law, and the relationship between any potential breach and COVID-19.
If a contract does not include a force majeure clause, you may still be able to argue that COVID-19 has rendered performance impossible. This will depend on the particular governing law and the relationship between COVID-19 and the inability to perform.
For example, the Trump Administration’s new restriction on travel, prohibiting travel between the United States and twenty-six European countries, may make performance impossible under certain circumstances; the ban is limited to the movement of people, not cargo. This type of restriction, or restrictions on movement such as those in Italy, may be sufficient to render performance of a contract (for example, attending an event at a hotel in Europe) impossible. Again, this should be addressed on a case-by-case basis with particular attention to the governing law and any other relevant contractual provisions.
As COVID-19 is an ongoing global epidemic, we cannot fully ascertain the extent of the disruptions to business and the economy. Continue to assess your litigation risks and contractual obligations as the COVID-19 outbreak continues.