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Will the Coronavirus Make Your Business Sick?

On January 30, 2020, the World Health Organization declared that the spread of coronavirus, a contagious respiratory illness, has become a global health emergency. In an effort to contain the outbreak, businesses located throughout China, ranging from giant manufacturing plants to fast-food restaurants like McDonald's and Starbucks, have temporarily and indefinitely closed their doors. Travel bans to and from infected territories are also in effect. Although the risk of catching the virus remains very low for most people outside of China – in fact, the seasonal flu is a more serious threat – the economic impact of coronavirus is being felt across the globe. Industries that ship materials in and out of China such as construction, manufacturing, retail, technology, food, automotive and more are all experiencing delays.

What does the coronavirus epidemic mean for you if your business relies on importing from or exporting to China? If your materials are delayed, thereby causing delay to your ability to perform under your contract, are you at risk for liability for failure to perform? The answer requires a thorough review of your contracts and transactions currently under negotiation.

First, does your contract contain a force majeure provision?

Often entities, in order to insulate themselves from a natural or man-made event that may impact their ability to perform, will include a force majeure clause in their contracts. A typical force majeure clause may permit a party to extend, suspend or even terminate its performance when an event that delays its performance occurs that is beyond that party's control. But – as is true with most contract-related disputes – whether that event will excuse performance is based on the language of the contract and applicable law. Courts will ultimately look to the language that the parties specifically negotiated to determine if the parties intended for the provision to apply to the specific event.

Therefore, the question is: Does the force majeure or some other provision in your contract protect your business if coronavirus impacts your ability to perform? It depends.

Here are key considerations when you or your counsel review your contracts:

What kinds of extraordinary events excusing performance are listed in your contract?

Often force majeure provisions list a series of events that will excuse performance (e.g., war, riots, floods, fires, terrorism or other events beyond our reasonable control).

Although use of the word "other" might seem to serve as a catch-all, it is important to understand it may not cover delays due to coronavirus. Some courts may interpret "other" to mean "other such like" (i.e., anything not specifically mentioned must have a reasonable degree of similarity to those events that are specifically mentioned). So while delays due to coronavirus are beyond your reasonable control, a court may find that such delays are not covered by the "other events" term because an epidemic is not sufficiently similar to enumerated events like war, riots, floods or terrorism.

Does your force majeure require a showing of an actual impact on your ability to perform?

Many force majeure clauses require actual impact on an entity's ability to perform, not just mere inconvenience or loss of profitability. It may be important to consider the evidence required to make this showing at the earliest possible juncture.

What if your contract does not contain a force majeure clause?

You are not necessarily out of luck in arguing that you are not responsible for delays caused by coronavirus.

For example, where no force majeure provision is present, "impossibility of performance" may be raised as an excuse for delay or failure to perform under a contract. To determine if performance was impossible, foreseeability of the extraordinary event often must be considered. To the contrary, when parties agree on force majeure language, foreseeability may not need to be considered. However, some force majeure clauses specifically require that the event be unforeseeable to succeed.

Also, be aware that there may be other provisions relating to scheduling that don't use the term force majeure that may apply. It is important to pay close attention to time deadlines and other notice and claim provisions that may act as conditions for obtaining scheduling extensions and/or force majeure relief.

The impact of the coronavirus on businesses reliant on importing and exporting from China is not yet fully known. But if your business could be impacted, you should review your contracts to determine whether you have the ability to mitigate the impact of this epidemic. Likewise, you should consider the lessons of coronavirus when negotiating your future transactions.

© 2020 Much Shelist, P.C.

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About this Author

Scott R. Fradin, Construction Attorney, Much Shelist Law firm
Principal

Scott serves as co-chair of the firm’s Construction Law group. A highly experienced attorney and licensed architect who practiced in the field for several years, Scott works closely with individual and institutional owners, developers, builders, architects, engineers, contractors and specialty subcontractors to guide projects from inception through completion and dispute resolution. His legal practice is international; he has advised clients on construction projects in almost every U.S. state and in Canada, Chile, China, Israel, Mexico, Poland and Turkey, among other...

312-521-2619
Josh M. Leavitt, Construction Law Attorney, Much Shelist, Law Firm
Principal

Josh Leavitt concentrates his practice in construction law, including disputes, contracts, and counseling on industry risk. He has over 25 years of construction law experience, and is an elected Fellow of the American College of Construction Lawyers. 

312-521-2627
Sarah K. Quinn Associate Business Disputes Class Action Defense Employment Litigation Employment Compliance & Dispute Prevention
Associate

Sarah is an experienced litigator and business advisor who handles all aspects of commercial dispute resolution. She has managed cases–from strategy to discovery to settlement negotiations–in both state and federal courts and before administrative agencies. Sarah has conducted and defended numerous depositions and has presented witnesses during trial.

Sarah has led cases involving alleged violations of Title VII, Title IX, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Whistleblower Protection Act and the Employee Retirement Income Security Act....

312-521-2712
Joanne A. Sarasin, Much Shelist Law firm
Principal

Joanne Sarasin concentrates her practice on complex commercial litigation with specific emphasis on appellate practice, especially with regard to insurance coverage issues. She has successfully obtained not only insurance coverage, but also additional damages against insurers who have acted in bad faith towards their policyholders. Her successful representations include obtaining insurance coverage for policyholders sued for defamation, for architectural malpractice and for violations of federal statutes resulting in class actions under the Telephone Consumer Protection Act,...

312-521-2685