Will the Coronavirus Make Your Business Sick?
How the Epidemic May Impact Companies that Rely on Chinese Imports and Exports
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.