The web of commercial contracts between businesses is essential to our community. Under ordinary circumstances, the courts provide the mechanism to enforce contracts and provide the commercial certainty that communities need for a thriving economy.
These are not ordinary times.
Few commercial contracts contemplated a “global pandemic” and you probably won’t find the term in your written agreements. Yet, as shops close and we shelter in place, businesses are wondering where they stand regarding their contractual obligations, which may have become impossible to perform. Some businesses are unable to perform because they have been ordered to close. Other businesses are unable to perform due to supply chain interruptions. Others are unable to perform because their employees are quarantined.
And, unfortunately, some bad actors will almost certainly try to use the pandemic as a pretext to wriggle out of their obligations.
So, we have to ask questions: During these difficult times, can we enforce our contracts when the other side is not performing? Or – can we legitimately avoid liability when we can’t perform?
Depending on your situation and your contract language, you may have several options. Broadly stated, unforeseeable events that happen after the contract was signed may excuse nonperformance.
FORCE MAJEURE
Although rarely used, commercial contracts frequently include a boilerplate force majeure clause. These clauses generally excuse a party’s nonperformance when an unforeseen event makes performance difficult, impossible, or delayed and could not have been avoided by that party. Force majeure does not protect against normal business risks, but rather from events that are beyond the party’s control. Notably, mere economic hardship is usually not enough.
Typical force majeure events include war, acts of God, terrorism, strikes, government regulations or orders, and disasters. Whether the COVID-19 pandemic could be covered by one of these or other terms in a force majeure clause remains to be seen, and will likely be a subject of litigation in the near future.
IMPOSSIBILITY
For many businesses in the current crisis, it has become impossible to perform whether due to the pandemic itself or the numerous government orders, including orders to cease doing business. The doctrine of impossibility may excuse nonperformance of a commercial contract. It’s generally not enough to say that performance has become more expensive or difficult, it really must be objectively impossible. Even if your business has not been ordered to shut down, an interruption in your supply chain might make it impossible to perform, and that nonperformance might be excused.
IMPRACTIBILITY
The related concept of impracticability may also excuse nonperformance if it would be unreasonably difficult or expensive, despite being technically “possible.” Invoking this doctrine usually means you still have to perform to the extent you are able – even if that means partially performing during the pandemic and then fulfilling the remainder of the contract at a later time.
ILLEGALITY
For some businesses, performing their contracts now could mean breaking the law or one of the many COVID-19 related government orders. The doctrine of illegality may excuse nonperformance of a commercial contract in such circumstances.
FRUSTRATION OF PURPOSE
Brides and grooms (and their parents!) around the world are feeling the frustration of canceled wedding plans. And countless conferences have been canceled or postponed due to government orders limiting large gatherings or just because it makes sense to protect health and safety. Sometimes, the legal principle of frustration of purpose may excuse nonperformance when events change the basic assumptions underlying a contract and its purpose. In such situations, neither party may be at fault, yet the underlying purpose of the contract (e.g., to hold a wedding) has been frustrated.
MATERIAL ADVERSE EFFECT
Many commercial agreements (especially mergers and acquisitions agreements) contain so-called “material adverse effect” clauses. These clauses typically allow one party to terminate an agreement if a specified event occurs that materially and adversely impacts the deal. These clauses probably don’t specify a “pandemic” as a qualifying event, but it’s worth a close read.
EXCUSE BY FAILURE OF PRESUPPOSED CONDITIONS
Under the Uniform Commercial Code (UCC) rules for commercial sales contracts, a party may sometimes avoid or delay performing its contractual obligations if something happens that the parties assumed would not happen, or if delay or nonperformance is necessary to comply with government orders. As with the doctrine of impracticability, a business must usually still perform to the extent that it can do so, even if that means partial performance now and full performance later. (Though partial performance can lead the receiving party to terminate the agreement if the overall value of the contract is substantially impaired.) Like many of these doctrines, this may not be a perfect solution but is an option that should be considered carefully.
As with all legal matters, the application of these concepts depends on the specific facts, circumstances, and contracts involved. The important thing to remember is that you may have options.
This is also a reminder that the manner in which contracts are drafted and negotiated is important. It may make a meaningful difference to your business to ask an attorney to review your business agreements before they are signed to avoid potential pitfalls or ensure appropriate provisions are included. As litigators, we are often approached by potential clients with problems that could have been avoided or minimized if they had sought an attorney’s advice before finalizing the deal.
Contact our Business Litigation Team at (630) 527-1595 with questions or for a free consultation.
Learn more about our Business Law practice here.
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