On March 11, 2020, the World Health Organization (“WHO”), officially declared COVID-19, commonly known as coronavirus, a pandemic with nearly 120,000 confirmed cases in 114 countries and over 4,000 deaths. With the number of cases, deaths, and countries affected expected to climb in the coming days and weeks, the virus’ global impact is extremely uncertain and far from over. As numbers rise across the globe, governments, businesses, and individual persons will react and address this increasing threat to commerce differently.
While most people have been taking personal precautions, there are other precautions regarding business and contractual relationships that are worth your concern. Mandated quarantine, supply chain disruptions, and office closures attributable to COVID-19 are just a few of the many ways that the virus may prevent a party from upholding its contractual obligations.
As businesses prepare for impending spread of the coronavirus, this is an excellent time to review their respective contracts with clients, vendors, partners, and others alike to determine how their contracts’ terms or Louisiana’s commercial law may affect the contractual rights in light of the coronavirus.
FIRST: READ THE CONTRACT.
Each contract and its terms will be different, but many agreements may contain certain provisions that state if and how a parties’ obligation might change in the event of pandemic or fortuitous event. In order to determine the extent to which your obligation may change, it is best to turn to the agreement in question and determine whether it contains a force majeure provision. These provisions may provide guidance or determine how (if at all) a party’s obligations might change in the event of certain circumstances.
If the contract does provide for such circumstances, then a party should follow the terms provided in the contract. For example, certain force majeure provisions may provide that if performance or:
such delay or hindrance [in performance] is due to strikes, lockouts, acts of God, governmental restriction, enemy act, civil commotion, unavoidable fire or other casualty, or other cause of a like nature beyond the reasonable control of Landlord or Tenant, then performance of such work, service or other act shall be excused for the period of such delay, and the period for the performance of such work, service or other act shall be extended for a period equivalent to the period of such delay.
If a party to that agreement is unwilling or unable to abide by the contract’s original terms, that party should contact the other parties as soon as possible, which may require a formal notice declaring force majeure. However, if the terms do not provide for a force majeure situation, a simple contractual amendment between the parties may avoid potential liability for breach.
WHAT IF MY CONTRACT DOESN’T SPECIFICALLY MENTION PANDEMICS AS AN EVENT OF FORCE MAJEURE?
In Louisiana, businesses often look to the Louisiana Civil Code article 1873-1878 (the “Articles”) for guidance and how they might apply in a particular situation when certain situations are not provided for in contract. These Articles are the default rules about how contractual obligations may be modified, suspended, or extinguished due to a “fortuitous event” that renders performance of a contract “impossible” either in part of in whole. However, these Articles only apply if the parties themselves have not addressed a pandemic or relative force majeure event in their respective agreement.
WHAT IS A FORTUITOUS EVENT?
A fortuitous event is one that could not have been reasonably foreseen at the time the contract was entered into. Foreseeability is the key; a conflict may occur if the contract was recently entered into or negotiated such that notice of an impending pandemic or wide-spread virus may negate a party’s ability to invoke these Articles or force majeure terms. However, a specific determination of what may constitute a fortuitous event will be based on the facts specific to the contract and circumstances surrounding performance. Commonly, contracts will define an “event of force majeure” to include: an act of God; war, hostilities, invasion, act of foreign enemies; earthquakes, lightning, cyclones, hurricanes, floods, drought, or such other extreme weather events; and, epidemic, famine, plague, or other natural calamities.
When a “fortuitous event” makes a party’s obligation to perform impossible, either in whole or part, a court may either reduce the counterperformance proportionally (e.g., a reduction in the contract price) or declare the contract dissolved. However, the court will attempt to uphold the contract with partial performance if possible.
WHEN IS PERFORMANCE IMPOSSIBLE?
A fortuitous event will only relieve a party’s obligation if performance is truly impossible. Increased difficulty or burdens on the obligor will not qualify; the circumstances must be preventative in nature to the extent that a party cannot complete its obligations. If a party cannot satisfy an obligation due to a fortuitous event, the party should seek substitute goods or services to render performance. These substitute measures should be documented to use as evidence to bolster any defenses should the obligee demand performance or assert a claim for breach. In sum, if a party does not at least attempt to locate a substitute good or service that could fulfill its contractual obligation, it may be unable to prove that a fortuitous event made performance of the obligation impossible.
An obligor is typically liable for its failures to perform; however, when a failure to perform is due to a “fortuitous event,” which has made performance impossible, an obligor is not liable. If the entire performance owed is impossible, the contract is dissolved by operation of law. If the contract is dissolved, but a party has already partially performed, that party is entitled to recover any performance that has already been rendered.
Businesses should review any contracts that may be affected by COVID-19 to determine what their respective rights and obligations are in light of this pandemic. If a contract does not contain a force majeure or other clause addressing the given situation, then the Articles discussed above will apply. Whether the COVID-19 pandemic is a “fortuitous event” will be contract specific, and whether performance of a contractual obligation is truly “impossible” will vary based on the circumstances. In many instances, the appropriate course of conduct may not be clear and we recommend that you consult counsel.