We regularly hear about the impact the pandemic has had on the real estate and customer service aspects of businesses, but the virus has also had a significant effect on internal business operations. Since many business operations are managed by contracts, for example, supply chain orders, recruiting, and partnerships, it is important to understand how to navigate agreements that your business signed prior to the outbreak of COVID-19.
The Impact of COVID-19 on Contract Performance
For businesses, overall performance in their contractual responsibilities could be significantly hindered, if not absolutely barred, due to the coronavirus pandemic. The damage of this will be especially felt by businesses that, at the inset of the pandemic, were not considered “essential” and those that have not be able to take advantage of available business assistance programs. For example, several suppliers and contractors who were forced to shut down manufacturing or construction operations continue to have no idea when they will be able to resume production. All businesses, but especially those that fall into the “non-essential” category, will want to closely examine their current contracts to decide if there are any clauses they can reasonably utilize to defend themselves from COVID related breach of contract claims.
The most applicable defenses to a no-fault inability to perform are Force Majeure, Impossibility, Impracticability, and Frustration of Purpose. Have your attorney review your agreement for these clauses and see below for a better understanding of when they may apply.
One of the first clauses you should look for if you are concerned about contract performance disputes is a Force Majeure clause.
Force Majeure literally translates to “act of God”. This provision is usually located toward the end of your contract, near or as part of the termination language section. It is also often found in event contracts, and may allow a legal defense to breach of contract claims when you are unable to perform your end of the contract due to things like war, floods, fires, or otherwise unforeseeable “acts of God.”
Many times, a Force Majeure clause will specify and enumerate events. Pre-COVID, many agreements did not specifically delineate a pandemic as part of this clause. However, in a more broadly drafted agreement, a business could assert that the pandemic constitutes an unforeseen, uncontrollable event that is substantial enough to alleviate them from their commitments under the contract.
Impossibility and Impracticability
The defenses of impossibility or impracticability are considered legally similar and can be asserted in situations where a business is simply unable to perform in accordance with the terms of the agreement due to the unforeseen occurrence of an event that began after the contract was created. For example, a drought causes a significant shortage of coco plants resulting in the inability of a candy manufacturer to produce enough chocolate to fulfill a candy shop’s order.
- Contractual performance becomes impossible due to an extraordinary and exogenous event; or
- A new law or government order prohibits the party from doing what was promised, also known as “legal impossibility”.
Courts only allow impossibility to be used under a narrow scope and its rarely applied without good cause. The hesitation in applicable comes because this defense is thought to weaken the pure nature of a contract as a legally enforceable promise. If courts frequently excused businesses from their contracts when performance turned out to be harder than initially anticipated, businesses would lose faith that contracts had any true legal power. This is why you should not generally expect to apply this doctrine to increases in labor wages or prices of goods attributable to inflation. Be sure that your performance is truly impossible, through no fault of your own and that you can show efforts taken to cure the issue.
Similarly, the defense of impracticability releases contractual performance due to an unanticipated circumstance or occurrence that causes extreme and unreasonable difficulty in performance.
Again, an increase in cost or shortage of labor are not enough of a hurdle to overcome contract enforcement unless the totality of the circumstances leading to the shortage are extreme and unreasonable.
Frustration of Purpose
This provision is used to argue that the original purpose of the contract, as both parties understood it, has been “frustrated” or drastically changed due to no fault of your own. For example, if your business rented an event booth from a community event organization, with both parties understanding the intended purpose of the rental, and the community event was later cancelled due to COVID-19, then your business could attempt to assert that the purpose of the contract has been frustrated.
Asserting These Provisions
Prior to asserting these provisions make sure you are in compliance with the following, as failure to adhere may result in dismissal of your defense claims:
- Notice: It is important to carefully follow any notice provisions in your contract related to invoking force majeure, impossibility, impracticability, or frustration of purpose.
- Foreseeability: Courts often believe that only ‘unforeseeable’ events can be the grounds for excusal of performance. Most contracts anticipate an inherent, reasonable risk of performance and the parties are presumed to have agreed to bear any loss due an event that was foreseeable at the time of contracting. Work with your attorney to thoroughly review your reasons for non-performance to ensure they were not foreseeable.
- Restitution: Restitution prohibits unjust enrichment so, the party excused from performance would have to return any payments received in advance. Be sure you are prepared to do so.
As an alternative, or in addition, to invoking the clauses discussed above, a good faith approach for any business whose operations have been impacted by the pandemic is to communicate and negotiate solutions with your fellow contractees. Making sure all affected parties are aware in advance that you foresee complications with fulfilling an obligation on time can help greatly to avoid disputes and, possibly even extend time to perform. It can also help keep the business relationship amicable.
Given the wide-reaching impact of the pandemic, many companies have stronger incentives and desires keep agreements in place, even if they need to be modified.
Capital Partners Law can help with all aspects of your business contracts; whether you want to assert a nonperformance clause or negotiate new terms, we can guide you through it. Contact us today to schedule a consultation.
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This article is for informational purposes only. It does not create an attorney-client relationship with any reader nor should it be construed as legal advice. If you need legal advice, please contact our firm.