In the past week, we have witnessed unprecedented cancellations, suspensions, and closures.  Professional sports leagues have suspended their seasons.  The NCAA Tournament has been canceled.  Theaters and theme parks have closed.  Universities, high schools, and grade schools across the country have suspended classes.  Access to public buildings have been restricted.  The President has discouraged frequenting restaurants and bars, and strongly encouraged people to work from home.  While the economic impact of the efforts to stop the spread of the coronavirus to certain businesses is obvious, it may also have you scrambling to review rarely invoked contract provisions and legal concepts.

For instance, many business contracts include “force majeure” provisions.  While these provisions will vary from contract to contract, conceptually a force majeure provision will typically allow for the suspension or termination of obligations under a contract due to causes that are outside the control of the parties and could not be avoided by the exercise of due care.  While force majeure provisions, and statutory definitions of the term[1], often turn on the existence of an Act of God (e.g. earthquakes or tornados) before they are triggered, some force majeure provisions are drafted more broadly.  The more expansive versions tend to include a more extensive list of events that will allow the provision to be relied upon.  Some such provisions have been known to include triggering events such as declarations issued by the Center for Disease Control and World Health Organization, disease epidemics, and even declarations by the government in a state of emergency.  In short, whether the coronavirus and related government declarations are sufficient to trigger a suspension or excuse of one party’s contractual obligations will be driven by the terms of the applicable agreement.  Thus, regardless of which side of this issue you find yourself on, the first place to turn is the specific language in your agreement.

Another contract business owners directly impacted by the coronavirus ought to be reviewing is their insurance policy.  That is, depending on the language in your policy, business interruption insurance may be invoked and a claim may be warranted.  While business interruption insurance typically covers loss of business income suffered after a disaster (e.g. fire, hurricane, or earthquake) that forces the closing or interruption of business, much like the force majeure provisions, insurance provisions and related exclusions will vary from policy to policy.  Things such as government forced cessation of business activity may be a covered loss.  Check your insurance policy to see what is covered and what is excluded as the wording of the policy will prove critical.

Finally, companies feeling the sting of this virus may also be hearing for the first time of a legal concept known as the doctrine of “impracticability of performance.”  Performance may be considered “impracticable” under the law due to “extreme and unreasonable difficulty, expense, injury, or loss to one of the parties.”[2]  While the type of events that typically arise to the level needed to invoke this doctrine include death, incapacity for performance, or destruction of the thing necessary for performance, impracticability of performance may also exist when activity is prohibited or prevented by law.  Whether the most recent directives from the government for suspending operations of certain types of businesses amount to an impracticability of performance is yet to be determined, but it is likely that this infrequently invoked legal doctrine will be called upon often in the upcoming months.

There is no doubt many businesses are finding themselves in uncharted waters.  But the foregoing should not cause business owners to panic or despair.  Take a deep breath, and review, evaluate, educate yourself, and, when needed, seek assistance.

[1] A.R.S. §33-801(6).

[2] Restatement (Second) of Contracts § 261 cmt d (1981).

For more information on this topic or other business law and commercial litigation matters, please contact Mr. Olexa.
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Garrett J. Olexa | Read Bio