The Impact of COVID-19 on Business Contracts – How Can I Avoid Breaching a Contract?
If you are a business owner, it is vital to consider how the COVID-19 pandemic may affect your business contracts, as every contract is different and, therefore, will require its own assessment and consideration of risks and options.
The duration and extent to which the COVID-19 pandemic will affect business relationships in the U.S. are still unclear. However, it will surely have an impact, so you must be prepared.
Companies with whom you do business may experience disruptions that prevent them from performing their contractual obligations. Lenders will probably seek further security or assurances before proceeding with loans, and it may take longer for them to approve new loan agreements. Similarly, government processes may slow as governmental agencies experience operational disruptions or redirect their attention and resources elsewhere.
These are just a few examples of how the COVID-19 pandemic may affect your business. It is crucial to review your business contracts to be prepared for whatever comes. Before taking action under an existing agreement or entering into a new one, you must consider your legal rights and responsibilities to determine how to proceed.
Does “Force Majeure” Apply to COVID-19?
A force majeure clause may provide the parties to a contract with some relief if certain extraordinary events delay performance or render it impossible. Commonly referred to as “Acts of God,” the unforeseeable events that constitute force majeure include natural disasters, war, governmental directives preventing performance, and – in some cases – global pandemics. While these clauses are frequently captioned “Force Majeure,” that is not always the case. Instead, your contract may have a clause that lists a number of extraordinary events. It is crucial to review this section carefully to determine whether your contract addresses events like a global pandemic.
However, even if a contract does not have a force majeure clause or if the clause does not cover a global pandemic, there may still be some options available to avoid a breach of contract. That is where the help of a business attorney becomes crucial.
My Contract Does Not Have a Force Majeure Clause, What Can I Do?
- Impossibility or Impracticability
If your contract does not have a force majeure clause, certain legal principles will apply if unforeseeable circumstances make performing either impossible or impractical. General financial hardship will typically not excuse performance or justify terminating a contract – there must be an intervening event the parties could not have foreseen.
Even without a force majeure clause, the terms of a business contract can control the outcome of a dispute over a rare event that renders performance impractical or impossible. While it is a bit difficult to imagine that parties to business contracts would contemplate the worldwide pandemic we are currently experiencing, they may have contemplated supply chain disruptions, for example; therefore, a careful review of the language of the contract is vital.
- Frustration of Purpose
When it comes to contracts, there is a doctrine known as “frustration of purpose,” which assumes a party can still perform but it would be irrationally burdensome to do because an unforeseeable event has made the reason for entering into the contract irrelevant. For example, suppose a promoter rents a 10,000-person arena to hold a basketball tournament. If a tornado destroys the arena, the doctrine of impracticability applies, excusing the promoter from performing. However, if the promoter leases the arena but then cancels the tournament due to COVID-19 concerns, it is still possible to use the arena, but the purpose of renting the building – holding a basketball tournament – has been frustrated, and the doctrine of frustration may excuse the promoter from performing.
What Steps Can I Take to Avoid Breaching a Contract?
If you are currently operating under an existing contract, you should consider the doctrines of force majeure, impracticability, or frustration of purpose only in extreme circumstances. Cessation of performance or termination of a contract based on these doctrines can be challenging, even if a party believes that an unforeseeable event has occurred. If that party is wrong, he or she could be breaching the contract.
Consider doing the following:
- Review your existing contracts and search for such terms as “force majeure,” “events,” “impossibility,” “impracticability,” or “frustration of purpose;”
- Review any business contracts into which you are about to enter and consider whether to modify or add a force majeure clause.
- Talk with the other parties and learn about any potential barriers to performance they have or may have in the future.
- If you are a purchaser or supplier under a supply contract, make contingency plans to address potential disruptions.
- Review your insurance policies to determine whether you have adequate business interruption insurance or whether you need it.
The COVID-19 Pandemic Will Affect Your Business Contracts – Be Prepared, Work with Experts
As the coronavirus outbreak unfolds, we urge you to be safe and wish for the best, but also to prepare for the worst. Protecting your business will be critical during this uncertain time. Therefore, it is important to understand your legal rights and obligations before taking actions or responding to actions taken by others.
If you have any questions related to how the coronavirus pandemic will affect your contracts, please do not hesitate to contact a member of our team by calling (305) 921-0440 or by sending an email to Romy@JFLawFirm.com to schedule an initial consultation.