Unforeseeable circumstances – such as the outbreak of coronavirus – that prevent a party from fulfilling its contractual duties may fall under the force majeure clause of that contract.
Force majeure clauses are specific to each contract and operate as a risk allocation mechanism to govern situations that are beyond the parties’ control, such as the outbreak of war or natural disasters. Whether the COVID-19 outbreak constitutes a force majeure event depends on the exact wording and scope of the provision in the contract. For example, if the force majeure clause:
- expressly specifies epidemics, diseases or public health emergencies, then COVID-19 likely qualifies as a force majeure event;
- covers “acts of government,” then travel bans may be covered.
The party seeking to invoke force majeure usually must show a causal connection between the event – the outbreak of COVID-19 – that made it effectively impossible to perform its contractual duties. The clause may operate to excuse or suspend performance of a particular contractual duty.
Some companies are providing force majeure notices to their contract partners. The China Council for the Promotion of International Trade announced that it will offer force majeure certificates to help companies deal with overseas contractual requirements. The effectiveness of these certificates and notices will depend on the exact language of the contract’s force majeure clause.
If your contracts do not contain a force majeure clause, then the narrower doctrine of frustration of the contract purpose may apply. To qualify under this doctrine, the event must (1) be not reasonably foreseeable and (2) radically change the contract terms from what the parties agreed to.
Of course, there is no court guidance yet on how the COVID-19 outbreak may affect commercial contracts. The facts are still evolving. But as businesses prepare for the impact of the virus in the United States, they can look to the cases that arose out of past unexpected events like the September 11 terrorist attacks, previous changes in Chinese government policy or unprecedented weather events as a guide to how to deal with key contracts.