As the novel coronavirus dominates headlines and conversations across the country, many businesses have eyed their pending contractual deadlines with growing concern. After all, supply chain bottlenecks are leaving manufacturers without necessary parts, and demand shortfalls threaten other companiesthatmay lack the requisite cash flow to meet their obligations.
But what can businesses do? As a first step, they should proactively review their contracts to assess which obligations they can meet and whether they have legally valid reasons not to perform their other obligations. In many cases, businesses will not be liable for breaches where (1) an “act of God” that affects their contract, or where performing the contract is either (2) impossible or (3) impracticable.
An “act of God” is, under Arizona law, an extreme“force”of nature that could not have been anticipated and provided against.” Southern Pac. Co. v. Loden, 19 Ariz. App. 460 (Ct. App. 1973). Therefore, because the coronavirus is a largely natural phenomenon that went largely unpredicted, it may qualify as an “act of God.” That means if your contracts contain an “act of God” provision—sometimes called “force majeure”—a court may excuse you from liability if the coronavirus caused you to breach. You should be aware, however,courts do not read “act of God” provisions into contracts that do not contain them. Technology Const., Inc. v. City of Kingman, 229 Ariz. 564 (Ct. App. 2012).
In these cases, however, all is not lost. Some businesses may still avoid liability by arguing that fulfilling their obligations is either impossible or impracticable. Next Gen Capital, L.L.C. v. Consumer Lending Associates, L.L.C., 234 Ariz. 9 (Ct. App. 2013). In contrast with “act of God” provisions, impossibility and impracticability provisions are often read into contracts that do not contain them. Further, some contracts contain specific provisions relating to either disaster recovery, business continuity, and/or purchase orders that may permit you to eliminate or mitigate your liability. Because contracts vary greatly, it is important to review your contracts with an experienced attorney who can determine your obligations, excuses, and other outs.
Once this review is complete, the business will typically knows its leverage and should then enter into negotiations with sellers and/or buyers. As the coronavirus’ chaos continues sweeping through the country, many businesses will likely prefer reasonable compromises over expensive litigation. Wise business owners will be proactive and use this to their advantage.