COVID-19 and Contractual Obligations

COVID-19 and Contractual Obligations

The ongoing COVID-19 pandemic has disrupted global markets and has thrown many areas of business operations into disarray. As we move through this situation, it is important to consider the possible impact of the COVID-19 pandemic on your contractual obligations and to take steps to educate yourself and protect your business. This post contains a brief overview of selected legal concepts that may be relevant to your business’ contractual obligations during the COVID-19 pandemic, as well as recommend the next steps.

Contractual Remedies

Force Majeure: Force majeure clauses are often included in commercial contracts and typically release or suspend the parties’ obligations when an unforeseeable event occurs beyond the control of the parties, such as a natural disaster or armed conflict, which prevents or severely hinders the performance of the contract. Not all force majeure clauses are the same; some are more broadly worded, while others specifically list what types of events can trigger a force majeure.

  • Enforceability: Enforceability and interpretation depend on the applicable law governing the contract. For example, New York courts generally interpret a force majeure clause narrowly, requiring that the clause specifically references the type of event invoked and that the triggering event was unforeseeable. Other international and US state jurisdictions may take a more expansive approach in interpreting force majeure-related clauses and in some instances (e.g., China3 , India4) have actually issued certificates authorizing certain parties to invoke/rely on force majeure clauses/concepts.
  • Specific Reference to Pandemics: If your force majeure clause specifically includes pandemics, it is highly likely that the force majeure clause can be exercised relating to the COVID-19 pandemic. Review your force majeure clause to check for alternative performance requirements in the event of a pandemic.
  • General Force Majeure Clause: If your force majeure clause is more general in its terms and does not expressly include pandemics, the outcome is more unclear. Generally speaking, the COVID-19 pandemic is the type of event that a force majeure clause is intended to capture, but the ultimate enforceability of a clause will depend on the specific language and applicable jurisdiction. However, you could argue that a pandemic is an act of “God” or that “government action” relating to the pandemic (e.g. government policies, shelter in place orders, travel restrictions) could rise to the level of a triggering the force majeure clause if they are beyond the reasonable control of the parties.

Common-Law Remedies – If your contract does not contain a force majeure clause, you may look to common law concepts, including the following:

  • Frustration: Frustration is a common law concept that may be invoked where the underlying purpose of a contract has been obstructed by an uncontrollable outside situation, such that the parties can no longer achieve the originally intended purpose of the contract. To illustrate, if a 300 guest wedding must be canceled due to COVID-19-related government restrictions on social gatherings, frustration could be argued to excuse the engaged couple from the venue lease.
  • Impracticability/Impossibility: Similar to frustration, the common law concepts of impossibility and impracticability excuse performance under a contract when performance becomes impossible or unfeasible due to a change in circumstances. However, these concepts are generally only available when an underlying assumption of the contract was that the triggering event would not occur.
  • Takeaway: The above common law concepts are typically invoked as defenses to breach of contract lawsuits and courts are generally hesitant to excuse a party from a contract due to frustration, impracticability, and/or impossibility. However, the current unprecedented government regulations, guidance, and orders (e.g., stay at home orders, travel restrictions) would strongly support invoking one of these concepts with respect to COVID-19, provided that the relevant contract has been significantly impacted.

Recommended Next Steps Moving Forward: As your business transitions through the COVID-19 crisis and begins to look forward, we highly recommend you review all aspects of your existing contracts, particularly if performance has become difficult or impossible due to COVID-19. Look for provisions that may be affected by the ongoing pandemic. Look also for any provisions which require you to notify the other party of complications, delays or nonperformance, and take steps to ensure you are complying with all provisions as best you are able.

If you are unable to continue performing under a contract, we recommend assessing all available options (including negotiation, force majeure, common law concepts, etc.) and consulting with legal counsel before taking action.

Please note that the bullet points and analysis above are necessarily summaries in nature do not necessarily deal with every important topic or cover every aspect of the matters that may be applicable to your specific business. It is not designed and does not provide legal advice.

 

1 Disclaimer: This document does not necessarily deal with every important topic or cover every aspect of the matters that may be applicable to your specific business. This document is not designed to provide legal or other advice.
2 See Goldstein v. Orensanz Events LLC, 146 A.D.3d 492, 492 (1st Dep’t 2017) (despite the force majeure clause applying to “any cancellation,” “the clause must be interpreted as if it included an express requirement of unforeseeability or lack of control”).
3 http://en.ccpit.org/info/info_40288117668b3d9b017019772b5706b0.html
4 https://www.pv-magazine.com/2020/02/24/solar-projects-reprieved-as-indian-government-declares- coronavirus-a-force-majeure/

 

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This publication does not necessarily deal with every important topic or cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice. www.sequoialegal.com