COVID-19 and Contracts: Perform ... or NOT?
Updated: Apr 13, 2020
"The only time anyone is concerned about the details of a contract is when someone is trying to get out of it."
Humor usually reflects an underlying truth ...
In law school, this was my Contracts professor's joke about when the details of a contract really matter. And as a result of the recent COVID-19 pandemic, a so-called "boilerplate" contract detail that will become more and more important to most business owners is called a "force majeure" clause. Sometimes incorrectly referred by non-lawyers as an "act of God" clause, force majeure is historically understood as some force of nature such as a tornado, flood or hurricane; or a man-made occurrence such as a third-party labor dispute that was not reasonably foreseeable at the time of contracting. Typically, these situations, when properly noticed, permit non-performance.
Take a look at your written contracts. You will probably find something like this:
"Neither party shall be liable for any failure or delay in performance under this Agreement for causes beyond that party’s reasonable control and occurring without that party’s fault or negligence, including, but not limited to, acts of God, acts of government, flood, fire, civil unrest, acts of terror, strikes, or other labor problems other than those problems involving the party’s employees, respectively."
So what exactly is an act God? Is it really a pandemic originating from a vendor selling live animals in Wuhan China? And what kind of negligence by you or your employees will render this clause useless in your situation?
When I was an engineer in the automotive industry, the major automakers took into account union contract expiration dates when negotiating three-year contracts with their Tier One suppliers. Does that mean the contracting parties were negligent, or the situation reasonably foreseeable, when an "unexpected" union strike interrupts a supply chain and prevents a party's performance?
Unfortunately, especially in Illinois, there are precious few prior lawsuits on point, either under the common law or section 2-615 of the Uniform Commercial Code (UCC). What we are seeing nationally is force majeure clauses that are too broad being found unenforceable as impermissibly vague; or so incident-specific that a Court will not enforce an overly detailed force majeure clause unless the disruption at issue is specifically listed to legally excuse performance under a contract.
This means you may also hear something most clients hate to hear from their lawyer--it depends. And you will probably not be shocked to learn that COVID-19 related contract lawsuits on this issue have already begun in Illinois and Arizona just to name two places.
However, this does not mean you cannot take proactive action right now. My advice to current and former clients is to take these three proactive steps immediately:
1. Pull all existing contracts to which you are a party and send them to your lawyer for review before a dispute comes up. This includes the language found on many standard Purchase Orders.
2. Engage your lawyer to review your company's force majeure clauses and suggest updates for future contracts based on your company's specific needs and risks.
3. Reach out to your current suppliers and customers at the appropriate management level and address this force majeure issue before a disruption occurs. If you need assistance, call your lawyer before one or both parties files a lawsuit. What you do to mitigate the circumstances in advance will almost certainly matter with regard to money damages if a lawsuit does get filed.
In short, don't wait until you or your customer wants to use the force majeure clause of a contract to either avoid or enforce performance of a contract.
Since 2013, Windy City Trial Group has represented small to mid-sized businesses from across the United States and Canada that are sued in federal and state court in Chicago.