The blackest of black swan events, a pandemic pestilence has descended upon us. Beyond our immediate focus on the health and well being of family, friends and each other, what of the legal implications for commercial contracts? While government, businesses and all of us do what we can to “flatten the curve” of the outbreak, those actions, by design, will have the effect of slowing up, if not seizing up economic activity for some period of time. If you are under a contract to deliver 100 widgets to a customer, have purchased materials to build the widgets, but now will be delayed indefinitely due to the virus, with the customer signaling that it does not need the widgets at all because of the pandemic, what will be the outcome?
The Coronavirus illustrates why contracts, and the so-called “boilerplate,” often dismissed by businesspeople and overlooked by lawyers, matters. The boilerplate, in the case of Coronavirus the “force majeure” clause, is the classic example of the legal details not mattering, until they do. At its essence, a contract is an agreed-upon allocation of risk between the parties. A well-drafted agreement will include a force majeure clause that contemplates the so-called “act of God” events that can delay performance, frustrate the central purpose of the agreement or in general make the performance of one or both parties impracticable, if not impossible. Contractually speaking, the legal outcome of coronavirus induced disrupted economic activity will be fact-specific to each individual situation. Absent a force majeure clause in a contract, the courts will look to uncertain common law to determine the result. Alternatively, if the parties have a contract with a force majeure clause, the courts will look to the language of what constitutes a force majeure event, which arguably would include the coronavirus pandemic, and the result intended by the parties flowing from that event. The bottom line: The coronavirus is a profound example of an event that most parties could not have contemplated when they reached a commercial agreement. A properly drafted force majeure clause provides a contractual foundation for legal analysis from which to base a business discussion, hopefully leading to a mutually acceptable negotiated result, versus the costs, risks and uncertainties of a litigated dispute. The contract, even the lowly boilerplate, matters.