Managing Contracts in the Time of the Coronavirus Pandemic

The coronavirus pandemic has come in like a wrecking ball on a path of destruction, creating an unprecedented public health crisis and bringing the economy to a near crawl.

Several legal fallouts have only begun to take place and will likely continue for some time. One of the legal challenges coming to light as a result of this pandemic is that many businesses, particularly those dealing in goods and services, or relying on goods, face inevitable inability or extreme difficulty in fulfilling their contracts both during the pandemic and for an unknown period of time thereafter.

How do businesses continue to fulfill their contractual obligations when governments have ordered nonessential workers to stay home and goods that they regularly relied upon have become suddenly unattainable?

These are no longer theoretical questions. Many businesses are now experiencing serious disruptions in their supply chains. Procuring certain types of goods, particularly from China, has become increasingly difficult, if not impossible. Businesses faced with these problems will seek to avoid contract performance without penalty, while those needing goods and/or services will be looking to induce contract performance.

Under the contract principle of force majeure (“greater force” in French), an unexpected event or extraordinary circumstance may excuse or suspend performance of a contract. Historically these include war, strike, government order or act of God (typically a natural disaster like a hurricane, tornado or earthquake).

First, determine if your contract has a force majeure provision. If it does, the next step is to figure out if that provision specifically addresses outbreak or virus. More importantly, in the event of litigation, would a court find that COVID-19 excused performance under the circumstances?

The application of this type of clause will depend on the specific language of the clause and the choice of law that applies under the contract. Some provisions may specifically exclude disease or pandemic, while others may specifically provide for it.

If the contract in question does not contain a force majeure clause, you can look to the doctrines of impracticability or frustration of purpose. Both may apply to certain situations in which a party’s obligations under a contract can be excused or mitigated because of the occurrence of a supervening event. The supervening event must be one that had not been anticipated at the time the contract was created, and one that fundamentally alters the nature of the parties’ ongoing relationship.

Relief from contractual obligations due to frustration of purpose is not easily granted. Frustration of purpose arises when performance can still be carried out, but the supervening event fundamentally has changed the nature of the parties’ overall bargain.

By comparison, under the related doctrine of impossibility or impracticability of performance, a party is excused from having to perform his contract obligations where performance has become literally impossible, or at least inordinately more difficult, because of the occurrence of a supervening event that was not contemplated by the contracting parties.

Without specific language pertaining to force majeure, a contract for the sale of goods is governed by the Uniform Commercial Code. The UCC provides for the basic assumption that, if there is a world-altering event and contract performance has become impracticable, the performance of some terms or expectations of the original contract may be excused.

Invocation of any of these provisions will likely give rise to disputes regarding whether companies did enough to find alternative solutions. For example, a fact finder will likely consider whether a party seeking to excuse contract performance did enough to find goods sourced from other parts of the world and the practicability of obtaining such alternatives. This sort of analysis may be different for each industry and is likely to change with the passage of time and evolution of the situation. Based on what we have seen with the trajectory of this pandemic and related fallout, what is practicable today may no longer be practicable or even possible next week.

If you are currently faced with an inability to fulfill your contractual obligations or are on the other side of the equation expecting performance on a contract where the other party is unable to perform, you should consider the following:

1. Monitor the situation and understand the impact the outbreak has on your ability to perform your obligations under a contract. Consider the other party’s obligations and how they may be affected.
2. Be mindful of any notice provisions.
3. Keep detailed records that include the scope of the interruption to your business and detail the factors leading to impossibility or impracticability.
4. Consider practical solutions to legal issues. An amicable compromise or mutual agreement to reschedule events or other contract performance deadlines to a time after the crisis has subsided may be in everyone’s best interest. While you may be able to successfully invoke a force majeure clause or other provision of your contract, consider the future impact of this on your long-term business relationship. In an unprecedented move, the state and federal courts have significantly decreased their operations for all but emergency applications and proceedings. Therefore, litigating most contract disputes will inevitably be delayed for an indeterminate amount of time.
5. Consider drafting or redrafting force majeure clauses and contracts for the future. As discussed, these clauses can be a lifesaver for a company faced with unforeseen circumstances beyond its control, such as the COVID-19 pandemic. However, if drafted poorly, these clauses in a contract are only an illusion of a protection and will not save a company from unforeseeable pitfalls.

If there is a silver lining to the coronavirus pandemic, it is that it will likely foster improvement and innovation as historically seen during prior times of crisis across many areas, including the drafting of contracts. While virtually no contract is airtight, this pandemic will undoubtedly result in better drafted, more precise and purposeful agreements.

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