In the wine industry, it remains to be seen how coronavirus will impact businesses domestically and internationally, and the extent to which “force majeure clauses” in contracts may provide relief to impacted businesses. With much of Italy currently on “lockdown,” and great uncertainty here in the US, our clients are facing international and domestic supply and retail issues such as a reduction in the supply and availability of grapes and bulk wine; supply chain disruptions, changes in relationships with supply and retail partners; reduction in access to/or an increase in the cost of the third-party services used to produce and/or sell wine; wine country tourism and wine industry event disruption – all of which are costly and harm business.
2019 Novel Coronavirus
2019 Novel Coronavirus also known as “coronavirus disease 2019” (COVID-19), “2019-nCoV” or “severe acute respiratory syndrome coronavirus 2” (SARS-CoV-2) is a contagious strain of coronavirus that causes a respiratory tract disease and was first identified in December 2019 in Wuhan, China. Coronavirus has since spread to more than 65 locations internationally, including the US.
What is a “Force Majeure” Clause?
First things first: “Force majeure” is Latin for “superior force.” Many contracts contain a “force majeure” clause, the purpose of which is to define what excuses liability for breach of contract where delay or failure to perform is a result of an extreme event outside the reasonable control of the breaching party. In the business context, extreme events are generally referred to as “force majeure” events, i.e., events beyond the control of the obligor, that may arise and prevent a party from performing the contract. Examples include natural disasters or acts of war that negatively affect a seller’s ability to deliver goods under a sale of goods agreement.
Do Force Majeure Clauses cover Coronavirus?
Maybe. If the parties to a contract disagree as to whether Coronavirus constitutes a force majeure event, it will be up to a court to decide. It is an issue of contract interpretation, and it is fair to say that US courts will construe force majeure clauses according to their plain language. Therefore, the specific wording of the force majeure clause in the contract will be the key factor in determining whether coronavirus is a force majeure event, and whether the force majeure clause will excuse performance of the contract. For purposes of this post, lets assume that the coronavirus is an epidemic, pandemic or quarantine – of course that may change. So, you must first determine if an epidemic, pandemic or quarantine (for example) fall within the contract’s force majeure clause. A Force Majeure clause in a commercial sales or services agreement may look like this:
Force Majeure. In the event a Party is wholly or partially prevented from providing goods or services or if the provision thereof is interrupted or suspended, in each case by reason of any cause beyond its reasonable control including, but not limited to, fire, storm, flood, earthquake, explosion, war, strike or labor disruption, rebellion, insurrection, quarantine, act of God, boycott, embargo, riot, or governmental law, regulation or edict (individually a “Force Majeure Event” and collectively, the “Force Majeure Events”) or for emergency inspection, maintenance, repair, or replacement of equipment or structure (provided that the Party that is to provide the goods or services gives the other Party to the extent reasonably practicable advance notice of such inspection, maintenance, repair or replacement), such Party shall not be obligated to deliver such goods or services during such periods; provided that the Party that is to provide the goods or services give the other Party prompt notice, written or oral (but if oral, promptly confirmed in writing) of such inability and the purpose and likely duration thereof. Each Party will use reasonable efforts to remedy the situation and to remove, as far as possible, the cause of its inability to perform or comply and to assist the other Parties in securing any interrupted or suspended service, or goods, from an alternative source for such service or goods. The Party that is to provide the goods or services shall give prompt notice of the cessation of the Force Majeure Event affecting the provision of goods or services. If the happening of a Force Majeure Event continues for thirty (30) days or longer, the Party receiving the affected goods or services shall have the right to terminate the affected goods or services as set forth herein and shall have no further liability under this Agreement with respect to the termination of the provision of such goods or services.
Whether this standard clause covers a declared coronavirus epidemic, pandemic or quarantine is debatable. You could certainly argue that the language “including but not limited to” defines list of force majeure events broadly and would include such things, and while it remains to be seen how Coronavirus came to exist, perhaps it could be argued that it qualifies as an “act of God.” In any event, the specific language in the force majeure clause must be scrutinized. So, if the force majeure clause covers coronavirus, what next?
Understand your Obligations
Next, to invoke force majeure and excuse performance under the contract, you, as the nonperforming party, must provide notice to the other party and then show the existence of the force majeure event itself, and that you took sufficient and/or reasonable efforts to perform the contract regardless of the occurrence event, perhaps by finding an alternative source of supply. You will have the burden of proof, and meeting that burden should not be taken as a given. It is important to keep in mind that most courts do not consider increased economic expense to be a force majeure event – there being other contract remedies available in that case.
Also, consider other avenues to meet your burden of proof – for example, The Financial Times recently reported that The China Council for the Promotion of International Trade (CCPIT) issued 3,325 force majeure certificates since the beginning of February. A force majeure certificate can be an important proof document for companies to reduce their liability for breaching a contract. CCPIT states that such certificate has been recognized by more than 200 countries and region governments, customs, chambers of commerce and enterprises around the world, and has strong authority and credibility outside the country. On March 9, 2020 it was reported that a business effected by coronavirus successfully used a CCPIT force majeure certificate.
Now, those considering declaring a force majeure event based on the coronavirus outbreak must carefully consider whether it is worth the risk to do so before choosing to cease performing their obligations under a contract. Erroneously declaring a force majeure event may likely result in repudiation/cancellation of the contract and could provide the other party with a right to damages.
What Law governs the Contract?
Finally, do not overlook the importance of understanding what law governs the contract and where disputes must be brought. Most contracts identify the state of one of the parties to the contract as the governing law and venue for disputes. International contracts however may be construed under international law and/or require arbitration in international forums. This must be considered when evaluating the risk (i.e., the cost) of litigation.
Other Options to Consider
Can You Reject Goods For Fear of Coronavirus Contamination?
For those contracts dealing with the sale of goods (not services), the Uniform Commercial Code (“UCC”) § 2-602, affords a buyer the option to “rightful rejection” of goods. Whether fear of coronavirus contamination would qualify as a “rightful rejection” is tenuous at best, and if goods are wrongfully rejected, the seller will almost certainly be entitled to damages resulting from the wrongful rejection.
Will Business Interruption Insurance Apply?
Always check your available insurance coverage. As more businesses are negatively impacted by coronavirus and related issues, they must assess their insurance options. While business interruption insurance may be an option in some limited circumstances, generally “widespread exclusion of infectious diseases” from property and casualty insurance policies (which traditionally includes business interruption) by insurers in the US and Europe. If your insurance policy does not explicitly exclude epidemics, there may be some wiggle room on whether losses from coronavirus-related interruptions are “covered” occurrences.
As with every contract, the key is to understand your rights and obligations and make informed and rational business decisions in the face of uncertain times. A proactive and proper assessment of the impact of the coronavirus outbreak on your business and business relationships requires fact-specific analyses. If you have questions regarding Coronavirus, The Wine Industry and Force Majeure Clauses, please contact us and we’ll help.