The first thing on everyone’s mind right now is the health and safety of our family, friends and neighbors. But as the quarantines and restrictions increase with the spread of the coronavirus and COVID-19, businesses will start to be hurt as well. At some point, every business needs to know how coronavirus will affect their contracts. Are you going to get refunds for the things you already paid for? Are your construction contracts going to cost more because of delay?
The answer is: It depends.
If we want to predict the impact of coronavirus on business agreements, we have to read the agreements. They can treat the situation in a number of different ways. Many agreements have a force majeure or “act of God” provision. Maybe the contract calls these events “unavoidable casualties” or “events beyond the control of the parties.” The point is that different contracts may treat these situations differently. Let’s look at some examples:
- For construction, the standard AIA Agreement calls for an extension of the Contract Time – the time to finish the project. The extension will be for a reasonable time determined by the Owner. Also note that the standard AIA Agreement does not call for an automatic increase in the Contract Price. This means that a contractor might not get paid for time that is caused by breaking down and re-mobilizing their work.
- A contract for the sale or purchase of goods might be governed by Article 2 of the Uniform Commercial Code (UCC). If the contact does not have anything written about force majeure, the contract defaults to §2-615. That section says that the seller is not penalized for unforeseeable delays or unavailability. This section also says that if the seller can supply some, but not all, of what is required under the contract, that the seller must allocate what they have to all of their customers.
- Some real estate rental agreements – like AirBnBs, wedding venues, theaters, etc., might not refund payments if it is not useable because of a disaster. Some of these will give a refund if, for example, the venue itself is not useable. But say that you have reserved a house in Spain for a week of vacation. The fact that you cannot fly there does not automatically entitle you to a refund.
- The force majeure clause in the UCC is only a “gap filler.” That is, the parties can agree on anything else that they want. Some contracts say that is the supplier’s raw materials are stopped by an “act of God” that the purchaser can terminate the contract. On the other hand, some say that the purchaser has to wait until the supplier can start producing their goods again.
- Construction agreements can also alter the form AIA Agreement. Sometimes a work stoppage beyond the control of the parties allows one party or the other to terminate the contract. This also happens in construction contracts where a stoppage of work for 60 days that is “beyond the control of” the contractor allows the contractor to terminate the contract. Or this same clause could allow the owner of the project to walk away from the construction agreement.
Force majeure clauses will usually say that during one of these unforeseeable events, neither party has breached the contract. That seems only fair. But that is not the only important question. Businesses need to review their contracts to know what happens to any prepayments that they made, as well as what happens when the crisis is over. When life gets back to normal – or close enough to it – every business needs to know where they stand with their contracts.
Aaron Marines is an attorney at Russell, Krafft & Gruber, LLP, in Lancaster, Pennsylvania. He received his law degree from Widener University and practices in a variety of areas including Business, Commercial Real Estate, Land Use, Land Planning and Zoning matters.