5 Things Considered: COVID-19 and Contract Disruptions

Contracts often contain commitments involving businesses and/or individuals, with each party responsible for their own performance of duties. With the outbreak of the Novel Coronavirus (COVID-19), businesses and individuals are faced with uncertainty and disruption in activities that can affect both day-to-day transactions, as well as long-term agreements and arrangements. In these uncertain times, it is unclear if or when performance may be enforced or excused. Here are five things to consider.

1. Do you have an enforceable contract?

You must first have a valid, binding and enforceable contract in order to be able to enforce an agreement.  Conversely, if a binding contract does not exist, it will be difficult to enforce the particular terms.  Depending on the subject matter at issue, a contract can be written or oral, though written agreements are stronger and more likely to hold up in court pursuant to the statue of frauds.  The lawyers at Bezdik Kassab can assist you with identifying whether you have an enforceable contract to bring a breach of contract lawsuit or defend against one.

2. Does your contract contain a force majeure clause?

Whether you are seeking to enforce or excuse performance, a force majeure clause (French for “superior force”) is important. A force majeure clause protects contracting parties from, among other things, unanticipated “acts of God” and may suspend, delay or excuse performance altogether if the party can show that circumstances exist beyond their control.  Look to the terms of the contract to determine if specific conditions or category of events are outlined that would excuse performance and whether the contract states that this list is exclusive or non-exclusive.  For example, does your contract’s definition of “force majeure” include a pandemic or a general definition covering extraordinary circumstances beyond the reasonable control of the parties? Courts interpret the force majeure provisions narrowly.  Words matter.  The details of the contract terms are important and will dictate whether a force majeure clause applies to your specific circumstances.  

It is not enough that performance would be uneconomical, unprofitable or inconvenient.  Important things to consider when analyzing the applicability of a force majeure clause is whether the party can mitigate damages and whether there are other ways to perform and to also recognize that the party will likely be required to perform once the effects of the force majeure end. Again, what the terms of the agreement dictate, and their scope, is important.  Even among the most sophisticated of transactions, some of the contract terms may be unclear.  Bezdik Kassab can assist you with reviewing and analyzing your contract to help you understand what your obligations are and the applicability of the force majeure clause. 

3. Can the contracting party be excused from performance absent a force majeure clause?  

In some instances, there are excuses to performing under a contract even absent a force majeure clause, though they are less likely to forgive performance. A contract can become impossible to perform – an uncontrollable situation makes performance objectively impossible (a high bar to overcome).  Or performance may become impracticable – parties to the contract may be excused from performing where an unforeseeable event materially changes the nature of the party’s duties under the agreement. In addition, the purpose of a contract may be frustrated, which may excuse performance where the objective purpose of the contract has been defeated by circumstances that were created after the contract was entered into (basically, circumstances are now such, that the basis for entering into the contract has become insignificant).

In determining whether impracticablity applies, you want to consider, for instance, whether the subject condition making it impracticable to perform was foreseeable.  Has the contract been frustrated by the Coronavirus pandemic? If, for example, you entered into the contract in the last few weeks, the rise of the COVID-19 pandemic was foreseeable, therefore it will be difficult to excuse performance.  If, however, you entered into the contract the year before, foreseeability may be a stronger argument you can potentially make.  However, as discussed above, the terms of the agreement dictate, and even if any one of these doctrines apply, the party may still have to partially perform or delay performance to a later time.

4. Does your contract provide a non-performance or liquidated damages clause?

Review your contract to determine if it includes a non-performance clause, such as a liquidated damages clause, that dictates the predetermined amount of compensation for failure to perform.  In the event one party is unable to perform, a liquidated damages clause may motivate the parties to come to the table and negotiate a solution to avoid paying the predetermined amount under the liquidated damages provision.    

5. Are there alternatives?

Communication with the other party can be helpful.  Can you or the other party partially perform under the contract?  Can the parties postpone the underlying transaction or event so that the parties can eventually perform or partially perform? When longstanding business relationships exist between contacting parties, course of dealing can help determine the working relationship between parties, and whether they can come to a resolution based on past performance. Also, review your insurance policy to determine if you have business interruption or other applicable coverage that would apply in these types of situations.  For example, if your contract relates to an event that’s been cancelled, your insurance may offer coverage if your policy provides for event cancellation.  General business liability insurance may also be a source of coverage.

“5 Things Considered” is Bezdik Kassab Law Group’s regular publication of legal material and analysis to assist the reader in considering various legal issue and topics.  For additional information, please contact Bezdik Kassab Law Group for a no-cost consultation.

Bezdik Kassab Law Group is a boutique law firm specializing in Consumer & Mortgage Litigation as well as Business Litigation & Transactions (BLT).  To learn more about the Bezdik Kassab difference, visit the firm’s website and social media pages on Bezdik Kassab’s LinkedIn; Facebook; and Instagram.

This is a communication and/or solicitation.  The above considerations are not intended to be an exhaustive list. The information provided here does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.  Readers of this website should contact their attorney to obtain advice with respect to any particular legal matter.  No reader, user, or browser of this site should act or refrain from acting on the basis of information on this site without first seeking legal advice from counsel in the relevant jurisdiction.  Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.  Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client relationship between the reader, user, or browser and website authors, contributors and law firm.  All liability with respect to actions taken or not taken based on the contents of this site are hereby expressly disclaimed.  The content on this posting is provided “as is;” no representations are made that the content is error-free.

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