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How Will Coronavirus Affect Contractual Relationships and Obligations?

The coronavirus pandemic has disrupted practically every aspect of American life. Whether closed by government order or by concerns about public safety, millions of businesses around the country have seen their operations come to a halt. Despite the overwhelming effect of COVID-19, it is not a certainty that an “Act of God” clause in a business contract will enable a party to ignore its obligations under the agreement.

Many contracts include force majeure provisions that account for situations where an outside event prevents a signatory from fulfilling contractual duties. If you’re thinking of relying on this type of provision to justify nonperformance or if a party to an agreement is invoking a COVID-19-related Act of God clause against you, here are some factors to consider:

  • Terms of the agreement — As in any contract interpretation matter, it’s critical to examine the document to see if a pandemic is mentioned specifically or generally as an event that would affect the parties’ rights. For example, the collective bargaining agreement between the National Basketball Association and its players’ union specifically refers to “epidemics” as a force majeure event that allows the league’s owners to withhold salary and potentially revoke the entire agreement.
  • Impossibility vs. difficulty — Many unexpected things can drastically alter the feasibility of meeting one’s contractual obligations. However, just because something has become more difficult, economically impractical or even dangerous, that does not justify the use of an Act of God exception. Even in a relatively recent case involving a highly contagious disease, Morocco wasn’t able to invoke force majeure to escape liability after it canceled a 2015 soccer tournament while the Ebola virus afflicted West Africa. Though holding the tournament might have been unwise and costly, the Court of Arbitration for Sport ruled that it was not impossible.
  • Foreseeability — Another consideration when a party seeks to defend its nonperformance by claiming an Act of God is whether the circumstance was foreseeable. Financial downturns (even severe ones), shipping problems, material shortages and other situations affecting contract fulfillment are usually considered foreseeable. In fact, some agreements specifically exclude common problems that might lead a contract partner to invoke a force majeure

The unique nature of the COVID-19 pandemic has thrust all of America into uncertainty. Counting on Act of God language to relieve you from your legal duties might not be a sure bet, even if you believe you have a compelling case. Taking prompt steps to communicate with contract partners might be a better way to reach a solution that acknowledges the harm that was done and modifies certain rights and obligations. By working with a skillful, creative business lawyer, you might be able to avoid a serious conflict over how force majeure is defined in your situation. If consensus cannot be reached, your attorney can advise whether you might succeed in a legal action.

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The Law Offices of Donald W. Hudspeth, P.C. counsels business clients on various legal concerns. Please call 866-696-2033 or contact the firm online to make an appointment for a consultation.

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Donald W. Hudspeth
Principal Attorney

Attorney Donald W. Hudspeth has more than twenty years’ experience practicing corporate and business law. Before attending law school, Mr. Hudspeth held a stock brokers license at the age of 21 and owned his own business at the age of 23. He was a business law professor at Arizona State University, West Campus, and has conducted classes and seminars for a number of higher institutions and organizations. Mr. Hudspeth has published two books on law and is the founder of the radio programs Law on the Edge and Law Talk.

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Janae A. Perry-Meier
Associate

Janae Perry-Meier is a business and commercial law attorney focusing on international business. Janae handles both transactional and litigation matters, including: forming your business, drafting your contracts, franchising, business disputes, business divorce, mergers and acquisitions, private placements, securities compliance, and corporate governance. Janae also handles trademark registration, office action responses, and infringement cases.

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