How Will Coronavirus Affect Contractual Relationships and Obligations?

Originally published by MehaffyWeber.

The COVID-19 pandemic, more commonly known as the coronavirus, has changed the face of business operations forever and has left many business owners wondering how to push forward with contractual relationships they had in place before this crisis. The virus continues to infect people around the world and has caused significant disruption to the global economy. Business owners must now be concerned with how the virus has affected or may affect their contractual relationships and obligations and decide if they need to change, cancel, or defend the contracts under which they have legal obligations.

Read the Fine Print

The first step for business owners dealing with issues arising from the coronavirus is to read the contracts they have signed in detail. They must evaluate their business’s rights and responsibilities under any active contracts they have signed. Proactively reviewing these contracts to determine how risks of non-performance or delayed performance are allocated is a good place to start. Do the contracts have a force majeure clause and has it been activated? What obligations might be in effect if business continuity has been disrupted? Are there termination rights within the contract that can be exercised? Business owners can then rank their contracts by importance and potential for problems. The contracts with the most immediate potential impacts and the highest potential for failure should be handled first.

Discussion Can Go A Long Way

Business owners must understand the risks related to a potential contract failure. Suppliers should assess whether the flow of supplies will be delayed and then relay that information to the customer so that a dialogue can begin. If a customer is experiencing delays in product arrival or reductions in product quality in relation to the coronavirus, quickly contacting their supplier is critical. In either case, there may be room for negotiation among all parties involved in the contract. Resolving challenges through discussion can help mitigate damages – which is valuable to both parties – and may be an obligation to a party with a potential future claim for breach of contract.

Checking for a Force Majeure

When evaluating a business’s rights and responsibilities under a contract, it is essential to determine if a force majeure provision was included in the contract. A force majeure is a contractual clause that identifies events that may prevent a party from fulfilling its contractual obligations that are reasonably out of its control. If an event enumerated in the force majeure clause occurs, nonperformance can be excused. Some of the common events listed in a force majeure clause include acts of God, acts of terrorism, extreme weather events, labor disputes, epidemics, acts of government, or other events that are beyond the control of either party.

The precise terms of the contract are crucial here, as courts will only excuse a party’s nonperformance if the specific event has occurred. The language in the contract has to be very specific. The coronavirus could be covered by a force majeure clause that includes pandemics or viruses, but a party may still have the requirement to mitigate any foreseeable risks of nonperformance. Basically, if the nonperformance was foreseeable and was able to be avoided or mitigated by the performing party, the courts may not find the force majeure clause applicable. Extremely precise wording – potentially including the words ‘disease,’ ‘pandemic,’ or ‘epidemic’ – would provide a stronger basis.

Impossibility of Performance and Frustration of Purpose

If the contract being reviewed does not include a force majeure clause, businesses may be able to use other available defenses to nonperformance. The doctrine of impossibility of performance can help a party avoid being held responsible for breach of contract. Impossibility of performance can be invoked when unforeseen circumstances have occurred that make it impossible or impractical to perform under the contract. The party affected by the unforeseen event must show they suffered unreasonable and unforeseen hardship. Fulfilling the contract must be so impractical that it would be unreasonably difficult to perform, not just cost the party more money.

Frustration of purpose can occur when an unforeseeable event renders any contractual obligations substantially or completely different from those originally set forth by all parties for reasons beyond a party’s control. The party may be excused from performing under the contract even if it is able to, since the purpose of the contract is no longer valid. If the coronavirus has shut down a movie theater, and the contract involved was for a cleaning service to come in each day to clean the theater, then the contract would be frustrated since the cleaning service is no longer required.

The coronavirus might cause frustration or impossibility of a contract, but the bar for claiming that a contract is frustrated or impossible is very high. If these common law defenses are valid for a specific contract, that contract may be completely terminated. Before getting to that stage, renegotiation of the contract may be more beneficial.

Renegotiating Contracts Impacted by the Coronavirus

Maintaining strong relationships with business vendors and clients is vital during these trying times. Simply renegotiating the terms of a contract that the coronavirus has made impractical or more difficult to perform can save on litigation costs and the risks associated with litigation. Extending deadlines for performance by a few months or agreeing to wait to perform the contract until a vaccine is developed could allow both parties to continue working together. Mediation may be necessary to renegotiate the contractual terms.

Texas Contract Dispute Lawyers

As many businesses continue to grapple with the ongoing impacts of COVID-19, contract disputes are likely to continue to rise. These disputes can be incredibly complex and will require the insight of an experienced commercial litigation attorney. At MehaffyWebber, our lawyers have operated as a team across Texas for over 70 years handling these specific disputes. Contact us today to see how we can assist with your unique case.

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