The Importance of “Corona Clauses” while drafting a New Contract

In the wake of the COVID-19 pandemic, a new language has cropped out in contract law: the corona clause. Many businesses are reluctant about entering into new contracts during the current pandemic driven uncertainty, however, these allocation risk clauses may be the solution. This post explores what are corona clauses and their inclusion in new commercial contracts.

In contract law parties are able to allocate the risks and costs that are likely to encounter in a transaction. The limitation or exclusion of a party’s liability in case of breach has been widely used way before this pandemic occurred. In some cases, parties have expressly drafted in the contract the allocation of risks. In other cases, parties have not agreed upon a particular risk allocation. In said cases, the law governing the contract will be interpreted by judges or arbitrators in order to determine which party must assume the risk.

Commonly, parties include in their contract a force majeure clause or provision, which justifies their contractual non-performance under certain circumstances. In Ecuadorian law, a typical force majeure event considered as a valid excuse for a contractual obligation will be an earthquake, a shipwreck or an act issued by a competent authority (article 30 of the Civil Code). Generally, the government’s actions (e.g. curfew, international flight restrictions) ordered during a pandemic, such as COVID-19, may classify as a force majeure event. Due to the pandemic’s uncertainty more parties are invoking force majeure provisions to excuse their non-performance. However, the applicability of force majeure clauses requires that some conditions are met and still it will be subject to legal interpretation. Thus, parties entering into new contracts feel the need for a specific clause addressing the pandemic’s impact on their transactions in order to leave nothing up to the interpretation of judges or arbitrators.

In light of this, parties are including a “corona clause” in new contracts entered during Covid-19. In a nutshell, corona clauses are provisions that excuse a party who cannot perform their contractual obligations due to restrictions, curfews, delays and other events caused by the pandemic. These clauses are very similar to limitation of liability (force majeure) clauses. International contracts rely on the foreseeability of risk allocation. Post-Covid contracts will certainly be more explicit about what situations can be considered as force majeure or unforeseen events. Nowadays, parties are considering whether to include or not pandemics in their force majeure clauses. In addition, corona clauses may also address what happens if one of the parties is quarantined and unable to perform. The corona clause may provide flexibility or time extensions, it may establish that a party will not be in breach because of a delay or lockdown or that either party may terminate the contract if the performance of an obligation does not take place by a specified agreed date.

Despite the uncertainty of the future, it is foreseeable that the novel coronavirus will continue to affect the performance of contractual obligations in the upcoming months or even years. Thus, failing to adapt force majeure provisions to this “new reality” will cause many headaches for parties. It is advisable to tailor especial corona clauses with specific limitation of liability when drafting new contracts. These corona clauses will give parties the basic layer of legal protection they need against the effects of a possible second wave of infections and further lockdown measures.

Disclaimer: This document is informative and does not, and is not intended to, constitute legal advice.