The historic business disruptions caused by the coronavirus pandemic will likely lead to unprecedented litigation as parties to contracts debate whether force majeure provisions apply to their situations, Maryland attorneys say.
With nonessential businesses closed and citizens, with limited exceptions, required to stay home, attorneys are fielding questions from clients who wonder whether the pandemic qualifies as an “Act of God” that excuses them from living up to the terms of contracts.
Eben C. Hansel, partner at Ballard Spahr LLP in Baltimore, said pandemics and disease outbreaks are sometimes mentioned specifically in force majeure clauses — and have become more common in the last few years — but are not ubiquitous in contracts.
“We found looking at a bunch of contracts that most do not refer to epidemics or pandemics as an event, just because people weren’t thinking about it,” he said. “I think you will see 100% of contracts going forward are going to refer to epidemics or pandemics. There will be some language that evolves out of this.”
But even if a contract does not explicitly refer to pandemics, the recent orders from governors and mayors effectively shuttering businesses and ordering people to stay home are more likely to trigger force majeure provisions in a contract or the invocation of the doctrines of impossibility or impracticability.
“The difference between two months ago and now is before you had to say the pandemic was causing your performance to be impossible,” Hansel said. “Now, you have to say it’s governmental restrictions causing your performance to be impossible.”
Ira T. Kasdan, partner at Kelley Drye & Warren LLP in Washington, said the common law doctrines of impossibility or impracticability may be invoked in situations where government orders have closed businesses and restricted movement.
In early March, hotel and conference providers were the businesses primarily affected by the coronavirus, as large gatherings were being discouraged or outright prohibited, said Timothy F. Maloney, principal at Joseph Greenwald & Laake PA in Greenbelt. Today, virtually everybody is seeing contracts affected by the pandemic.
“Now, it impacts everyone on an unprecedented scale,” Maloney said via email. “Landlords and tenants. Businesses and customers. Vendors and suppliers. Just everyone.”
Kasdan said that “just about any contract is implicated” now, including those currently being negotiated that may need a clause to excuse performance if the emergency has not ended by a certain date.
Parties attempting to renegotiate contracts or negotiate new ones are faced with the uncertainty of the coming months, Hansel said.
“Now, we’re in a strange situation where it’s both foreseeable and unforeseeable,” he said. “We know that this is coming, but we still can’t foresee exactly what the consequences will be. Can someone who enters a contract now still argue that some consequence a few months from now is unforeseeable?”
Attorneys anticipate a significant amount of litigation as parties to contracts seek to establish liability and debate who should bear the cost of nonperformance.
Kasdan said that people and businesses on both sides of contracts are implicated, and that often they seek to preserve a business relationship for future deals.
“What everyone is trying to counsel is just be reasonable,” he said. “That’s not to say there’s not going to be a dispute at the end of the day.”
Maloney said most people are working to preserve business relationships through deferrals and compromises.
“Reasonableness should be the watchword of the day,” he said. “But someday, when the courts fully reopen and the virus is hopefully behind us, there will be a massive reckoning in the courts for those obligations that can’t or won’t be resolved. It remains to be seen how our legal system will handle such defaults on such a massive scale, especially our bankruptcy courts.”
Cases will be highly fact-specific and will depend on the language in a contract and the relationship between the parties, according to Hansel.
“I think there will be a ton of litigation coming out of this and it’s hard to know where it will go,” he said.
Case law provides no uniform answers.
“What I am finding is that case law is not always particularly helpful, both because it’s a state-by-state thing, so you might not find relevant case law in your state, and also any case that you find is usually going to be interpreting the language of a specific contract,” Hansel said. “You can find some general principles, (but) everything is so fact-specific.”