The COVID-19 (coronavirus) pandemic has presented unprecedented challenges to businesses in the United States and globally. With large parts of the economy shut down, and many employees required to work remotely, companies may be unable to meet the terms of their agreements with vendors, customers, and other third parties. What options are available to businesses?
- Negotiations. The initial strategy is for the company to reach out to its contract counterparties. Contracts may have been obtained in competitive market conditions and losing the contract during a temporary period of hardship could have long-term adverse consequences for the business. The counterparties will most likely be facing a similar situation with their own agreements so they may be open to negotiations. Such negotiations could include reduced performance, extending payment terms, putting a delay in place in performance of the contract during the period of the pandemic, and agreeing on a time to reinstate the contract, for example, within a fixed period of time after the facility reopens.
- Termination. If the counterparty is not responsive to negotiations, then it’s time to look in greater detail at the terms of the contract. The first term to look at would be the termination provision in the agreement. Can the agreement be terminated only for specific reasons (for cause) or for any reason (without cause)? Is termination effective on, for example, 30 days’ prior notice or is there a fixed expiration date? It may be possible to terminate a contract within its agreed terms and therefore avoid a breach, or to use the termination provision as leverage in negotiations.
- Force Majeure. If the contract does not expire for a significant period of time, then it is time to look further within the provisions of the agreement. A so-called “force majeure” (literally “superior force”) provision may provide grounds for non-performance under the agreement. The force majeure clause typically states that performance is excused under the agreement in specifically listed circumstances such as Acts of God, strikes, war etc.
- The court’s inquiry focuses on whether the specific circumstance is included in the clause. So force majeure clauses that include “pandemics” or “epidemics” should provide grounds for non-performance.
- If the circumstance was foreseeable, however, the force majeure clause will not excuse performance. The scope of the COVID-19 pandemic, and the measures that governments have taken closing portions of the economy and restricting employees’ movements, are likely to be deemed unforeseeable circumstances in contracts entered into before the coronavirus.
- Impossibility of Performance. In the absence of a sufficiently precise force majeure clause as grounds for non-performance, the next consideration is a principle of contract law that permits non-performance under the agreement if one party’s performance is made impossible by intervening and unforeseeable events.
- The condition causing performance to be impossible must be unforeseeable, which should be the case for agreements entered into before the coronavirus as noted above.
- States vary on the standard applied – some states require true impossibility to perform, while others, like California, more liberally excuse performance where it would require excessive or unreasonable expense.
- Frustration of Purpose. This is another principle of contract law that could be used to excuse performance where a party’s principal purpose in entering into the agreement is frustrated by an unforeseeable event, even though it is technically possible to perform (and therefore impossibility of performance does not apply).
Coronavirus is likely to cause widespread contractual disruptions.
- In some cases, federal, state, or local laws will impact such agreements (e.g. laws prohibiting evictions and foreclosures);
- In some cases, the parties to the agreements, being on both sides of the issue, and wanting to preserve business relationships, will negotiate solutions; and
- In some cases, the parties may resort to litigation, invoking force majeure, impossibility of performance, and frustration of purpose principles. We would expect courts on a go-forward basis to liberalize some of these doctrines in view of the unprecedented challenge of the coronavirus.
If you require any further information about contractual obligations during the coronavirus pandemic, please contact Edward Grenville, Managing Shareholder, Inspire Business Law Group, PC (firstname.lastname@example.org; +415 279 0779; www.inspirelawgroup.com).
This article is provided for educational and informational purposes only and is not intended to be, and should not be construed as, legal advice.
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