Coronavirus, Business and Contracts: Navigating Uncharted Waters

The impact of the COVID-19 global pandemic is rippling through the United States economy.  Mass cancellations, closures, travel restrictions, containment zones and school closures at every level leave many business relationships interrupted.  Goods and services previously planned for and anticipated are no longer required.  Buyers are scrambling to cancel.  The grocery store shelves are empty and the markets experienced perhaps the most volatile week in history.  We are entering a period of great uncertainty.  

An excellent example on a huge scale is the cancellation of the NCAA Division 1 men’s basketball tournament. Ramifications include not only loss of revenue generated to the NCAA directly related to television advertising rights, but also direct impact to the communities where tournament games were to be conducted. According to an article appearing in the Washington Post on line on March 14, 2020 by Will Hobson and Ben Strauss, the NCAA had reserved a block of 32,000 rooms in the city of Atlanta alone. The financial impact on the city is projected to exceed one hundred million dollars. The impact trickles down to the restaurants, bars, nightclubs, convenience stores, merchants and a myriad of service providers.

There are several legal implications. In some cases the business partners negotiated written agreements which include “force majeure” or “Act of God” clauses. As any term of contract, the courts first look to the language the parties adopted to determine applicability and scope. A force majeure clause lists a series of events such as earthquakes, storms, floods, natural disasters, wars, or other “acts of God” which the parties to a contract have agreed upon as excuses for nonperformance. As force majeure is a contract term and a contract defense, whether a global pandemic excuses performance will depend on the language selected by the parties and the specific circumstances.

Force majeure is applied to relieve a part from the obligation to perform contractually specified obligations. The doctrine is not intended to be applied to relieve an obligation to make a payment required by contract.

Where there is no written agreement which provides guidance, such as in circumstances where the sum total of the terms of contract are as set forth on a purchase order or invoice without terms and conditions, the answer is less clear. The Uniform Commercial Code, which governs transactions in goods between merchants, includes a provision which speaks to “commercial impracticability”. Pursuant to the UCC, delay in delivery or non-delivery in whole or in part by a seller is not a breach of its duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made, or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid. The below comment to the UCC describes the applicability of the principle of commercial impracticability;

Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance. Neither is a rise or a collapse in the market in itself a justification, for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover. But a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his performance, is within the contemplation of this section.

While the UCC applies to the sale of goods, the legal principle of commercial impracticability or impossibility of performance can be applied by analogy.

Cancellation of contracts causes financial impacts as well. College campus closures are a good example. Food service providers are no longer necessary as there are no students to feed. The caterer’s business has been “interrupted”. Many businesses acquire “business interruption insurance” to guard against such a sudden and substantial loss of revenue. However, the policy of insurance is a contract like any other and describes the basis of coverage as well as any applicable exclusions. One client I spoke to this week advised that their policy of business interruption insurance had an exclusion for interruption caused by “bacteria or virus”. That client is dependent on the availability of venues which the client does not control. It remains to be seen whether an executive order by a person of authority such as the Governor or the President of the United States, to the extent based on a “virus” will fall within the exclusion of the policy.

As we enter into this complex and turbulent time, we are bound to encounter novel and complex issues of law and contract. Business owners are encouraged to review their business plans, contemplate the potential impacts, review their commercial insurance policies and seek appropriate advice where necessary.