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Virus may trigger ‘force majeure’ clauses in contracts

BALTIMORE — Supply chain disruptions, closures and cancellations due to the spread of the novel coronavirus have attorneys fielding calls from clients wondering what their rights and responsibilities are under contracts that are affected by the situation.

Many contracts have “force majeure” clauses, which excuse performance when unforeseeable circumstances prevent a party from fulfilling the terms of the agreement. Clauses typically mention events such as natural disasters, war, terrorism, labor strikes and disease.

“We are getting a lot of calls about contract performance in a lot of different industries and areas,” said attorney Thomas G. Allen. “Obviously, there have been supply chain disruptions, there have been event cancellations — significant event cancellations — that I think are implicated, there have been deals that have been impacted because of the availability of financing.”

Allen, a shareholder with Greenberg Traurig LLP in the firm’s Washington office, said right now the priority for many businesses is the health and safety of their employees, but as “losses start to materialize” due to the virus, many will take a harder look at their contracts.

“That’s not only on the offense, but companies also want to know defensively what are the obligations of their counter-parties and how do third parties work into this too,” he said.

Events that have been canceled due to local or state directives against large gatherings are some of the early contract casualties of the coronavirus, according to Timothy F. Maloney, principal at Joseph Greenwald & Laake PA in Greenbelt.

“I think the big issue now involves commitments for hotel and convention contracts and we’ve been asked questions about that,” Maloney said. “The issue is if there is a government directive or a public health crisis that prevents fulfilling the contract, it probably triggers the force majeure provision.”

Charles Tiefer, a contract law professor at the University of Baltimore School of Law, said it is common for force majeure clauses to specifically mention epidemics as an event that could prevent performance.

“It’s a new world and these clauses have typically been drafted a long time ago,” Tiefer said. “The most important requirement is that performance is rendered effectively impossible. It’s not enough that it’s just costlier. It has to be effectively impossible.”

Advice to clients

Each contract is different, and the first step for a party concerned that the coronavirus pandemic will affect their business is to look at the language in their contract, said Michelle D. Gambino, also a shareholder at Greenberg Traurig in McLean, Virginia. The contract will also specify which state’s law applies, which can be key, she said.

“We’re generally telling clients, ‘You’ve got to look at the contract, look at the law,’“ she said. “If you can’t perform, really document the reasons why.”

Documentation should include the timeline of what health and government officials are saying, when suppliers and vendors report that they cannot meet deadlines, and anything else that affects the business’ ability to meet its obligations.

The most difficult part of reacting to the coronavirus is the fluidity and uncertainty of the situation, said Matthew A.S. Esworthy, partner at Bowie & Jensen LLC in Towson.

“I think clients should be documenting the events that are taking place and communicating with counsel to advise them of their situation so counsel can help them formulate a strategy that makes the most sense,” he said.

Allen, of Greenberg Traurig, recommended taking time to go over the specifics of a client’s situation.

“You can learn a lot if you’re advising a client by looking at the contract and taking 25 or 30 minutes to talk about the facts and circumstances surrounding that contract,” he said.

Cooperation

Because of the extraordinary nature of the disruption from the coronavirus, Gambino said she is seeing flexibility and understanding between parties without lawyers needing to get involved.

“I’m seeing way more cooperation as a result of all of these events without the lawyers trying to push that on either of the parties,” she said. “And I think it’s because there is a level of the person whose expectations are disappointed, they can’t — in the real world — put blinders on. They know what’s happening.”

Though parties to contracts usually have a duty to act in good faith and to deal fairly, Gambino said businesses seem to be flexible right now because they want to preserve relationships and understand that, but for the pandemic, it would be “business as usual.”

Allen added that attorneys would not be doing their jobs if they didn’t advocate for solutions that do not involve going to court.

“We almost always advise our clients to pursue a business solution first because at the end of the day, that will almost always be less expensive than litigation,” he said.

Maloney said the current situation “calls for fairness, restraint and good judgment.”

“I would think the best practice is try to work out rescheduling these things for some months down the road with the hope that some degree of normalcy might be restored by then,” he said. ”The most important thing is for everybody on both sides to be flexible, to recognize we’re in a national emergency.”

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