What Business Owners Need to Know About COVID-19 Disruptions to Contractual Promises
As the COVID-19 pandemic continues to affect the global economy, it is time for business owners to consider the effects which the virus may be having on existing contractual promises. Some providers of goods and services may be temporarily or permanently unable to do so due to the coronavirus situation. Previously-made agreements, such as those regarding purchasing, may now be impractical or even impossible to fulfill in these difficult times.
Business owners should take steps to ensure that they are informed regarding their own contractual rights and obligations and that they are aware of how each and every one of their existing contractual promises could be affected by COVID-19.
Assess Each Contract Individually
The first action business owners should take is to individually assess each active contract and ask themselves the following questions:
- To what extent does COVID-19 affect this contract?
- How necessary is this contract to the continuing operation of this business?
- What language is included in this contract which may apply to the COVID-19 situation?
The answers to these questions will determine the ideal course of action for business owners to take.
Contract Language Covering COVID-19
There are a number of potential elements of a contract that can cover what contractual rights the involved parties have during a difficult situation such as the current COVID-19 pandemic. Common clauses include:
Literally meaning "superior force," a force majeure clause addresses what happens should a party's contractual ability to fulfill their duties becomes difficult or impossible due to forces outside their control. The wording of a force majeure clause can vary from contract to contract. Some are specific, for example naming only "acts or war or extreme weather" as valid reasons for failing to fulfill a contract. Others utilize broader terms such as "acts of God" which could potentially apply to the current situation.
If any contracts contain a force majeure clause, read them thoroughly to identify any language which might apply to COVID-19. Applicable terms may include "epidemic" "pandemic" "quarantine" or "acts of the federal government" (referring to situations such as a state of emergency).
If you or an entity with which you have entered into a contract chooses to take legal action regarding this contract, keep in mind that the majority of states choose to interpret force majeure clauses extremely narrowly, focusing only on the language actually present. Additionally, courts generally assume the existence of contractual capacity, meaning that both parties are believed to have been capable of entering into the contract and consciously deciding the language it contains.
Impossibility of Performance / Frustration of Purpose
Language referring to "impossibility of performance" and "frustration of purpose" may apply even if a force majeure clause is not present in the contract. These are common-law doctrines that invite a closer examination of current circumstances and whether or not they prevent the fulfillment of contractual obligations. In particular, the frustration of purpose-relevant situations may occur due to the COVID-19 pandemic as it becomes commercially impracticable for businesses to purchase typical, previously-agreed upon amounts of various goods.
Keep in mind that "commercial impracticability" is generally considered by courts to be a far more flexible standard, as it only requires proving that the terms of a contract involving the sale of goods are "impracticable" in the current situation, rather than entirely "impossible".
Consider Negotiation and Amendment
Depending on the language used to construct a contract, the parties involved may possess contract rights to amend - or at least negotiate the amendment of - the agreement. If such terms exist, business owners should consider making use of them in order to amend existing contracts and create a situation that is more favorable to both themselves and their contract partner.
A business owner should ask themselves this: do I wish to continue working with this contract partner following the conclusion of the coronavirus pandemic? In such a situation, it is generally recommended that both parties are flexible and agree to negotiate the terms with one another. In these situations, a written agreement should be secured, as a mere verbal agreement may not be honored in court should legal action become required.
What About Breach of Contract?
It is, unfortunately, possible that breaches of existing contracts may occur due to the current global situation. Should a contract be breached, a business owner should not attempt to address the issue on their own. They should seek out the services of a business attorney in handling this case and taking any necessary legal action.
Choose Calkins Law Firm
Are you a business owner in the Cleveland, Buffalo or Chagrin Falls areas? Do you feel that a contract has been breached or requires re-negotiation due to the COVID-19 pandemic? In this case, Calkins Law Firm is the business law firm for you. Our experienced business attorneys will capably handle any and all contract disputes.
Contact Calkins Law Firm to set up an appointment today.