In addition to the tragic health impacts the coronavirus outbreak has had around the world, businesses across the globe are experiencing significant disruptions to their operations due to the pandemic. With shelter-in-place orders, social distancing rules, and other mandates drastically altering daily life in all areas, businesses are experiencing supply chain and cash flow interruptions on a broad scale. Given that many aspects of business operations are governed by contracts, a widespread and inevitable result of this health emergency will be contractual disputes related to companies’ inability to perform according to the terms of their agreements.
The Impact of COVID-19 on Contract Performance
Many parties’ performance of their contractual obligations will be greatly hindered if not completely barred due to the circumstances surrounding the coronavirus pandemic. This is especially true for companies that have not been classified as “essential businesses” that are permitted to continue operating notwithstanding government shelter-in-place orders, and/or who have no practical means of carrying on their normal work under the current circumstances. For example, suppliers who have had to shut down manufacturing operations due to the spread of the virus may have no idea when they will be able to resume work and produce goods that they are under contract to deliver to other businesses. Contractors who are responsible for large construction projects may have similarly had to stop work, with no projected timeframe for being able to resume. Companies in this situation will want to look closely at their current contracts to determine the presence of any clause they may be able to invoke to protect themselves from breach of contract claims.
One of the first things most businesses should identify if they are concerned about contract performance issues is whether the agreement at issue contains a force majeure clause. This kind of provision, often found in event-related contracts, will provide a legal defense to breach of contract claims for parties who find themselves unable to perform their end of the contract due to things like fires, floods, war, government actions, or otherwise unforeseeable “acts of God.” Sometimes a force majeure clause will specify the types of events that will excuse a party from performance, so it is important to be aware of whether this kind of limitation exists in your contract, particularly if health pandemic events are not included. However, with a more broadly drafted clause, a business could potentially argue that the coronavirus pandemic constitutes an unforeseen, uncontrollable event that is significant enough to relieve them of their obligations under the contract. Even if this may be a feasible defense in your case, it is important to carefully follow any notice provisions in your contract related to invoking the force majeure clause.
Impossibility, Impracticability, and Frustration of Purpose
If the contract you are worried about does not contain a force majeure clause, you may still be able to defend against breach of contract claims by asserting impossibility, impracticability, or frustration of the purpose of the contract.
In general terms, the defenses of impossibility or impracticability may apply in a situation where a company is simply unable to perform according to the terms of the agreement due to the unforeseen occurrence of an event that arose after the contract was created. For example, a significant shortage of raw materials arising from the unanticipated closure of a major supplier due to the coronavirus outbreak may prevent performance. Note that the concepts of impossibility and impracticability are not universally recognized in the same manner in all states, and are also used interchangeably at times, so it is important to check the law in your state to determine which of these defenses may be available.
Another alternative is to argue that the original purpose of the contract as both parties understood it has been frustrated due to no fault of yours. For example, if an organization rented an event space from a property owner to watch a nearby parade, with both parties being aware of the purpose of the rental, and the parade was cancelled due to the COVID-19 pandemic, the organization could arguably assert that the purpose of the contract has been frustrated.
As an alternative or in addition to invoking the legal protections discussed above, a prudent strategy for any business whose operations have been impacted by the pandemic such that it may not be able to meet contractual obligations is to communicate and negotiate solutions with the other parties. For example, communicating well ahead of time that you anticipate problems with fulfilling an order by a certain date, or renegotiating the financial terms of a deal, can go a long way toward avoiding disputes and preserving the contract, as well as the business relationship at issue. Particularly under circumstances where businesses in almost every sector of the economy will be significantly impacted, many companies may have stronger incentives than normal to keep contractual agreements in place, even if they need to be altered.