Does the Coronavirus Excuse a Breach of Contract?
When developing contract documents that all seem relatively standard, businesses may be inclined to pay little attention to those sections that are “just boilerplate.” Many assume that boilerplate is synonymous with meaningless. But while boilerplate contract language may appear to be made up of stock phrases, those words have real impacts and shouldn’t be overlooked.
Just ask DoorDash, a national food delivery company, that got slapped with $12 million in arbitration fees because a group of drivers decided to call the company’s bluff and use its individual arbitration clause—classic standard boilerplate language—against it. Or ask Lease Finance Group, a California-based commercial equipment dealer whose standard forum selection and choice-of-law clauses were held by a Federal Court to be unenforceable since they deprived lessees of a jury trial, even though waivers of jury trials are lawful in New York, the state the company made their choice jurisdiction.
Anticipating Known Unknowns
Even the most carefully worded contract provisions can’t guarantee an end to all litigation, but businesses can protect themselves by thoroughly understanding their exposure under any agreement—not just the day they sign, but every day after. Laws change, circumstances change, and businesses change. There will always be the possibility of an incident a business couldn’t foresee, but companies that work to anticipate those eventualities will find themselves more often on the winning side of any contract disputes.
As Donald Rumsfeld famously said, “Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know.” Those “known unknowns” can sneak up on a business that isn’t actively focused on identifying potentially problematic situations.
Coronavirus Supply Chain Impacts
The outbreak of Covid-19, the recent novel coronavirus, is exactly the type of known unknown that could wreak havoc on a company’s supply chain. As of March 9, 99 countries had confirmed Covid-19 cases, with 35 U.S. states reporting cases. With China at the epicenter of the outbreak, global supply chain disruptions are inevitable. As existing inventory at plants runs out, companies that rely heavily on Chinese parts—like those in the automobile industry—may be forced to stop production and may not be able to provide necessary services, like car repairs. According to reports, General Motors was forced to airlift supplies for its North American truck production.
The repercussions of failures along various parts of the supply chain will be far-reaching. So who takes the hit? In most cases, it depends on boilerplate contract language, from what constitutes a breach to whether contracts have a force majeure provision.
Force Majeure Clauses
Force majeure—literally “superior force”—provisions in contracts relieve a party from liability for non-performance if the party’s failure to fulfill its obligations under the contract is the result of circumstances that are beyond their control. Language can vary significantly. Some provisions set out specific instances that would relieve liability, sometimes including epidemics and pandemics. Others provide more vague parameters, such as an “act of God” or “circumstances beyond the parties’ control.”
The burden lies on the party that has not performed to show that, but for the specific circumstance, they would have been able to perform. They must also show that there is no alternative means to perform under the contract—and performance being more costly than originally planned is not generally a sufficient reason for non-performance.
Viewing force majeure provisions in light of the coronavirus outbreak reveals potentially significant contract exposure for manufacturers and retailers throughout the world. In every place that has experienced Covid-19 cases, the impact on companies has been not just from the virus (loss of labor force) but also from government acts (forced quarantines and plant closures) to contain the virus.
A Tier 2 manufacturer that has been closed because of quarantines and outbreaks will argue that their breach is the result of circumstances beyond their control. The Tier 1 manufacturer will argue the same, suggesting that the domino effect of their supplier’s closure was beyond their control. Whether these arguments would succeed depends on a decision maker’s interpretation of the specific contract language that governs the relationship among those manufacturers and the original equipment manufacturer.
As manufacturers and retailers scramble to build war rooms, identify alternative suppliers, and create more diversity in their supply chains, they would be wise to review the boilerplate language in their existing contracts and in any contracts they plan to enter into in the future. Delays, breaches, and non-performance can cost companies millions of dollars, not just in lost revenue but also in litigation fees and demands for complete performance. Companies that anticipate the known unknowns—whether it’s coronavirus or some future unimagined event—will be less likely to bear the financial losses when the unforeseen occurs.