The COVID-19 pandemic is an unprecedented global event. It will have far-reaching impacts on business practices long after the virus is contained. Rest assured that the entire Thrive Law team is working (remotely) to assist businesses in addressing these issues NOW to mitigate the negative impacts and help them prepare for the brave new world of business that will follow this difficult time. Every day, we sift through tons of misinformation and inconsistent advice littering the news and the Internet to make sure we are delivering to you the most accurate and up-to-date information.
Most recently, we’re getting inquiries from our clients and community business owners about which contracts are enforceable and which might possibly be modified during this pandemic, which no one could have foreseen at the time the contracts were drafted. We approach these questions from the perspective of “good business practices” first and legalities second.
From a practical perspective, if you have or want to maintain a healthy, professional relationship with other businesses, if it looks like one business or the other cannot fulfill the terms of a contract between you, we recommend that you collaborate and cooperate to come up with mutually agreeable changes to the contracts (written modifications). Doing so avoids unnecessary disputes, protects your future professional relationships, and mitigates losses. That being said, there have always been times when businesses don’t fulfill their end of a contractual bargain, and that is likely to happen in this environment.
1. Contracts are Still Enforceable
Yes, COVID-19 is a global pandemic. Yes, we’ve never seen a disease with such magnitude in our lifetimes. No, these facts are don’t give everyone a get-out-of-jail-free card that allows them to break their contractual obligations (or the law for that matter). So how do you know if the contract you’re questioning is enforceable right now and whether you or another business have defenses that justify nonperformance of that contract? Here is how courts think about these issues.
2. Is it really impossible for a party to perform the obligations under the contract?
The doctrine of impossibility applies to contract law (don’t go looking for a statute that outlines this because most of this is a common-law (court-created) principle). Impossibility means that if the contract is or becomes impossible to perform, it is no longer enforceable. This does not mean that performance will be burdensome, difficult, or harder than usual. Performance must be completely unachievable. To determine impossibility, the court does not rely on the word of one of the parties, it conducts a thorough analysis of the facts particular to each situation. Finally, for a contract to be impossible, the parties could not have known of the circumstances making performance unachievable and those circumstances must not have existed at the time the contract was made.
So you have to look first at the terms of the contract itself before you can determine whether performance is impossible. If you’re in the midst of a closing of a business transaction, and someone claims impossibility, check out what the contract says. Can the closing be done virtually? Can funds be wired instead of exchanged in person? Is the deal contingent on financing that is no longer available? Does the transaction depend on due diligence that can be conducted virtually? Was the pandemic foreseeable when the contract was made?
But if you’re a contractor up against a contractual deadline, and the materials you need to meet it are delayed or completely unavailable because of COVID-19 mitigation measures or quarantines, your ability to perform may indeed be impossible.
So, whether or not a particular contract is impossible in light of the pandemic depends on answering a bunch of factual questions and the answers vary widely based on your business and your industry.
3. Is this an “Act of God”?
In most contracts, lawyers usually include a provision with the fancy name “force majeure.” This clause usually says that when there are natural disasters or unforeseeable acts beyond the parties’ control that render it impossible to complete the contract, the contract will be unenforceable. BUT BEWARE. Not all force majeure clauses are created equal. The language of each particular provision determines whether the impact of COVID-19 excuses a party’s performance. These clauses often define what acts are deemed unforeseeable and usually include a catch-all provision that excuses performance for “Acts of God.”
In our experience, the force majeure provision in most contracts does not include a specific provision that excuses performance in the event of a pandemic or contagion. So, we anticipate that during this time, businesses will likely argue and possibly litigate over whether the COVID-19 pandemic is or is not an “Act of God.” As obvious as the answer to this question may seem to non-lawyer types, courts may see this differently. In the past, many insurance companies have successfully argued that communicable disease disasters and pandemics are foreseeable and so do not constitute an unforeseeable “Act of God.” At the end of the day, whether a force majeure clause excuses a party’s performance depends on the type of business, the industry, the specific language of the applicable force majeure clause, and the foreseeability of this pandemic.
4. Has the purpose of the contract been “frustrated”?
Another contract law principle you need to understand during this uncertain time is “frustration of purpose.” This means that the reason the parties entered into the contract in the first place no longer has meaning, has been interfered with, or no longer exists—its purpose has been frustrated. Whether this doctrine applies to the enforceability of a contract depends on the purpose of the contract.
So if an organization regularly hosts large live events or conventions and leases big hotel conference rooms and secures hotel rooms for attendees with large deposits, and the government issues an order prohibiting gatherings of 50 people or more, the purpose of the contract may be frustrated. But does that excuse the company from paying the lease fee? Is it entitled to a refund of any deposit? Is there a liquidated damages provision in the contract that entitles the host hotel to recover money when the business purpose for the contract has been frustrated?
The effect of the coronavirus certainly will frustrate the purpose of some contracts. But, as with the other contractual principles that may apply, frustration of purpose depends on the terms of the contract and the specific facts a particular situation.
5. What should you do?
If you think another party is going to break their contract with your business or you think you need to break your business’s contract with someone else, it’s important that you talk with an experienced attorney before you take action. At Thrive Law, we have found that our guidance and involvement early in contractual dispute often helps businesses resolve the dispute while avoiding unnecessary and costly legal battles. When litigation is necessary, we’ll help to put you in the best position possible to succeed.
Because Thrive Law is a small business, we truly understand the concerns of businesses and owners during this pandemic and work closely with our clients to educate them about the related legal issues so they can make intelligent and informed business decisions during this critical time.