Coronavirus: Planning for Contractual Disruptions
By: Lauren Groth, Member
With the impact of Coronavirus (COVID-19) changing daily, businesses in Boulder and throughout the Front Range are grappling with an increasing number of unpredictable events. Declarations of state emergencies, widespread cancellations, and social distancing measures all have an impact on business operations and revenue. While no one can predict where we will be in the coming weeks and months, planning and preparation are essential to weathering these uncharted waters.
Force Majeure Protections
For businesses providing goods and services pursuant to existing contracts, the first place to look when planning for the unpredictable is your contract’s force majeure provision. Force majeure provisions, by definition, address the parties’ options when dealing with circumstances outside of their control, for example, war, famine or other “acts of God.” Force majeure provisions provide protection to parties unable to perform by allowing the party facing unexpected difficulties to suspend, postpone, or end performance of its duties under the contract.
The language in your contract will provide guidance as to (1) what circumstances allow a party to be excused from performance of obligations under the contract and (2) what the party must do to seek the protection of a force majeure clause. In most contracts, a force majeure clause cannot be invoked simply because an unexpected event occurs. Rather, a party seeking relief must show that an event covered by the contract has occurred and was out of the party’s control and that the event had an effect on the party’s ability to satisfy its obligations under the contract.
If your business is anticipating difficulty in meeting its obligations under a contract in the coming months, it is important to look closely at existing contract language to determine whether the force majeure language is likely to cover current circumstances. While some contracts may explicitly mention plague or pandemic as triggering events, others may have more broadly inclusive language under which coronavirus could arguably fall. From there, you can evaluate what evidence or information you might need to establish the effect of coronavirus on your ability to perform, and when and how your contract requires you to provide notice to the other party.
Proactive Negotiations
We all know that business continues even in the midst of uncertainty. Companies and individuals negotiating new contracts and deals can also reduce their risk of future liability by being sensitive to the need to account for issues such as shutdowns, quarantines, and supply chain shortages in their contract language. Think carefully about whether existing schedules have built in the time necessary to account for possible delays, and whether anticipated costs reflect the likelihood that prices may rise in the coming months. If you are not the party responsible for obtaining the necessary materials or completing a project on time, you may want to consider adding provisions requiring the other party to take reasonable steps to minimize the impacts of a force majeure event such as coronavirus or place a limit on the allowable scheduling changes that can occur.
Although no one can fully anticipate what the future will bring, businesses can review existing contracts with an eye towards possible performance issues, and proactively negotiate to reduce the risk of contractual disputes down the road. If you have questions or concerns about your contractual obligations and how coronavirus may impact your business, please contact us.