What impact coronavirus will have in South Carolina is unclear, but it is clear that businesses are seriously preparing for the possibility that the workforce could be significantly affected. Companies across the state have issued guidance to employees regarding best hygiene practices, remote working contingencies and self-isolation protocols.
While the main focus of preventative efforts is (as it should be) on health and safety, this period of anticipation and preparation is an appropriate time to consider the potential legal consequences of the coronavirus, particularly as it relates to rights and obligations under commercial contracts. The spread of the virus could implicate a rarely invoked provision present at the bottom of almost every contract, the force majeure clause.
The underlying theory of force majeure (French for “superior force,” and sometimes called an “Act of God clause”) is that neither party to a contract should be strictly bound to its performance obligations if that performance is prevented by extreme circumstances outside of the party’s control. In essence, the force majeure clause is a principle of fairness—the parties negotiated the agreement under the assumption that some insurmountable obstacle would not arise, and it would be inequitable to punish a party because of the unforeseen event. So, a failure to act that would normally constitute an event of default is forgiven until the extenuating circumstance is over.
Force majeure clauses are almost always present in every form of commercial contract, including, among many others, leases, supply agreements, and construction agreements. If the contract imposes an obligation on a party, it probably has a force majeure clause. Further, though force majeure clauses are so common, they often fall into the provisions comprising the “fine print” or “boilerplate” of a contract. Parties often do not negotiate boilerplate provisions—or at least do not negotiate them as vigorously as the contract’s business terms. Because of this, it is likely that many parties have agreed to a force majeure clause without realizing exactly to what they have agreed.
A common force majeure template is included below - this one comes from a commercial leasing context, but the idea is similar across contracts:
“In the event Landlord or Tenant shall be delayed, hindered or prevented from the performance of any and all acts required under this Lease or by law, other than payment of any sums of money due (including without limitation Rents) or except as otherwise specifically provided in this Lease, by reason of an act of God, fire, casualty, strikes, picketing, work stoppage lockouts, inability to procure or general shortage of labor, equipment, materials, supplies, failure of transportation or power, restrictive governmental laws or regulations, riots, insurrection, war, inclement weather or any other cause similar or dissimilar to the foregoing beyond the reasonable control of the parties, the performance of such act or acts shall be excused for the period of delay, and the period for the performance of any such act or acts shall be extended for the period necessary to complete performance after the end of the period of such delay.”
As noted in the sample, the one obligation that is usually excluded from the force majeure clause is the payment of money. Even in times of crisis, the wire is expected to go through.
It is also important to note that some force majeure clauses require the party seeking force majeure protection to give written notice of the force majeure event to the other party.
How might coronavirus fit into a force majeure situation? Some clauses specifically call out disease as a force majeure event. Others are silent on epidemics but include a catchall provision that would likely cover a coronavirus outbreak.
Who might be affected? Consider a subcontractor who cannot meet a contract deadline because so many workers are home sick. Or a purchaser of real estate who cannot meet a due diligence deadline because an inspector is difficult to find. Or a service provider who cannot make a delivery in time because the virus has interrupted the supply chain. All of these parties might invoke force majeure protection so as not to be held in default under the contract.
Though all incorporate the same ideas, every force majeure clause is different and worthy of case-by-case analysis. Still, here at this early stage of the 2020 coronavirus season, we advise reviewing the force majeure clauses in all of your contracts as you begin to consider how force majeure protection might influence your - or your contract counterpart’s - behavior during this unusual time.
If you have questions about this topic or other contract-related matters, please contact Phillips or your HSB attorney.