Lessons in Contracts Taught by COVID-19

Post Authored by Zachary Gronewold

Unless you have been living under a rock for the last few weeks, you have heard about the immense changes to the economy and the world as a result of the spread of COVID-19. The World Health Organization has declared a global health emergency [1], the United States and other countries have declared national emergencies [2], and businesses both in the United States and abroad have shut down or switched to being completely remote in order to practice social distancing. COVID-19 closures could cause breaches of contract or unclear paths for clients with poorly drafted service or manufacturing contracts once they are able to resume their business.

If you have made it this far, you have probably already thought to yourself that a force majeure clause solves these issues. But like all answers in the law, it depends. First, not all contracts have a force majeure clause, state that a force majeure excuses performance, or even define an event constituting force majeure. This poor drafting could result in liability if the client is no longer able to perform under the contract. Under these circumstances, the client’s defense for failure to perform would be limited to the doctrines of impossibility/impracticability [3] or frustration of purpose [4].

If the force majeure clause properly defines a force majeure, then neither party can be held liable for its failure to perform as a result of that event [5]. Attorneys drafting force majeure clauses should ask clients if there are industry-specific events outside their control that would make it uneconomical or inconvenient for performance to continue. That information should be included in the force majeure definition. If this is done properly, it may help a client avoid liability.

However, without time limits or other restrictions, clients can be left in a grey area, not knowing how to proceed or the validity of the contract after the force majeure. This can be avoided by requiring performance to be restarted within a specified number of days after the force majeure; otherwise, the contract will be terminated. When drafting this section, attorneys should also consider other remedies their client may want as a result of a force majeure termination, such as returning unearned payments.

Another consideration for contract drafters to consider going forward is the notice clause. The traditional method of notice is via mail. If a business has gone remote, as many have in the wake of COVID-19, no one may be available to receive notice at the office. This means that it could be weeks before the notice is read. A contract could require notice to be sent via mail and email or specify that if there is a force majeure, all notices may be sent via email until the event has ended. This promotes communication between the parties and helps them resolve conflicts, rather than resorting to litigation.

Attorneys should be mindful of the above concerns when drafting and reviewing contracts, especially in the wake of COVID-19. It is imperative that attorneys remain diligent in drafting and negotiating every clause of the contract and not fall into the trap of using or accepting standard or boilerplate-style language. Taking the time to craft language that works best for clients assures their contracts will weather any force majeure that comes their way.

 

[1] Sui-Lee Wee, et. al., W.H.O. Declares Global Emergency as Wuhan Coronavirus Spreads, N.Y. Times (Jan. 30, 2020), https://www.nytimes.com/2020/01/30/health/coronavirus-world-health-organization.html.

[2] Trump declares national emergency over coronavirus, BBC News (Mar. 13, 2020), https://www.bbc.com/news/world-us-canada-51882381.

[3] Taylor v. Caldwell, [1863] 3 B&S 826.

[4] Krell v. Henry, [1903] 2 K.B. 740 [1903.

[5] Arthur Linton Corbin & Joseph M Perillo, Corbin on Contracts §74.19 (2017).

Neither party shall be responsible for any resulting loss if the fulfillment of any of the terms or provisions of this agreement is delayed or prevented by revolutions, insurrections, riots, wars, acts of enemies, national emergency, strikes, floods, fires, acts of god, or by any cause not within the control of the party whose performance is interfered with, which by the exercise of reasonable diligence such party is unable to prevent, whether of the class of causes enumerated above or not.

About the Author:

Zachary GronewoldZachary Gronewold is currently a 3L at UIC John Marshall Law School in Chicago. At UIC JMLS, he is the Alumni Relations Liaison on the Student Bar Association. He previously spent a semester working in the JMLS Conflict Resolution Clinic where he served as a Certified Mediator for small claims and landlord/tenant disputes. He is currently a law clerk for the in-house counsel at Atkore International, and is seeking employment opportunities as in-house counsel in the Chicagoland area.

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