The COVID-19 virus has shuttered business operations throughout the United States, and even after we all return to work, there will be continued disruptions due to supply chain and shipment lags. For both users and providers, there are questions of contractual obligation and liability that will be front and center for companies grappling with pre-existing agreements requiring performance of services or manufacture/delivery of product.
The threshold question is does your contract contain a force majure clause? If so, its terms will govern. Is the COVID-19 virus a trigger event? If a supplier has limited product, is there an obligation to allocate shipments among customers, and if so, on what basis? If the clause is triggered, does it relieve or simply suspend performance? Some clauses are specific and may identify a pandemic as a triggering event, while most are more general, requiring a government shutdown, a state of emergency, or an inability to access labor or materials. Some clauses have temporal limits as well. And, of course, there must be a causal connection between the triggering event (here, the COVID-19 virus) and the failure to perform. In the event a party declares a force majure, strict compliance with the provision’s notice requirements is critical, as is free and open communication with the counterparty to mitigate any loss, establish good faith, and engender cooperation in managing the crisis.
If there is no force majure clause, other legal doctrines come into play. New York, for example, allows relief from a contractual obligation under the doctrines of impossibility of performance and illegality. Some jurisdictions will allow relief based on impracticability, a lesser standard than impossibility of performance.
For sales of goods subject to the Uniform Commercial Code, UCC § 2-615(a) excuses performance when it is rendered impracticable by either (1) the occurrence of an event “the nonoccurrence of which was a basic assumption on which the contract was made”, or (2) good faith compliance with foreign or domestic government regulation. This standard is less stringent than common law “impossibility”, because it will excuse performance where it is theoretically possible but prohibitively expensive.
The economic repercussions of the current shutdown are enormous. Clients will need careful lawyering to pilot them through what are certain to be uncharted waters.
Joe DiBenedetto recently retired from Winston & Strawn LLP, after spending 46 years in its Manhattan office as a capital partner specializing in commercial litigation. He formed JDB Mediation LLC to further develop his mediation and arbitration practice, which is centered in Manhattan and its surrounding counties (including Westchester, Nassau, and Suffolk). Joe DiBenedetto’s experience, training, and other credentials are more fully described at www.JDBMediation.com