COVID-19 and Its Implications for Your Contract Performance
COVID-19 has precipitated unprecedented dislocations and hardships. Every aspect of our nation’s population and economy has been affected, often in shocking and unprecedented ways.
Many of you are facing a new reality of supply disruptions, cutbacks in demand for your products and services, and strains on your ability to utilize or maintain a workforce. Contracts may not be performed or available as anticipated, leading to unexpected disturbances that reverberate from business to business.
The resulting concerns are many and lead to such daunting questions as:
- Must we honor our contractual commitments with our suppliers if nobody wants our products or services at present?
- Can customers who agreed to purchase from us simply ignore our contracts?
- Must we honor our contracts with purchasers even though we have difficulty maintaining supplies and labor because of illness and government limitations on activities?
There are various doctrines and rules that help to answer these and related questions, but they are complex and generally call for legal analysis of the specific facts of each situation.
Force Majeure Provisions in Contracts
The starting point is to review the contract (even if it is just the terms and conditions on the back of an invoice) for a force majeure clause, a type of provision that is often given little consideration when contracts are signed. A force majeure provision is designed to apply to events it identifies that are outside the parties’ control. These events may include such things as wars, terrorism, labor strikes, specified shortages and delays, government orders, natural disasters, acts of God, and many other circumstances that the contracting parties have agreed will excuse performance of the contract. Force majeure provisions can vary greatly in scope and specificity, and state laws and courts across the country can differ in interpreting them.
No cookie-cutter answer suffices as to whether the COVID-19 outbreak creates an event of force majeure. Obviously, if a force majeure clause lists “epidemic” or “pandemic,” coverage is far more likely than if the closest included language is “act of God” or a general catch-all phrase. The actual language the parties inserted in their contracts is the first and foremost consideration. That is because the ability to declare a force majeure is a matter of ascertaining the parties’ agreed intent—the contract language in the clause is paramount.
Even if the force majeure clause lists the event in question, such a clause may have other requisites, including lack of knowledge or mitigation showings, that raise other questions, such as:
- Was the event not foreseeable at the time the parties contracted? (With COVID-19, foreseeability for contracts entered into before December 2019 would be far different than for contracts that were not signed until last week.)
- Is the party who wants to invoke a force majeure provision truly unable to perform or is it simply trying to get out of a contract because performance would involve merely higher costs or inconveniences during the crisis?
- May the entire contract be terminated or should only parts of it be ended or suspended for a limited time?
Even a party that has a force majeure clause available to invoke needs to consider the future consequences of undertaking such a step against an important supplier or customer. The potential harm to future business may greatly exceed obtaining such a short-term benefit. Nonetheless, handled carefully, such a clause could provide leverage in negotiation toward satisfactory resolution.
Because force majeure clauses have become (almost overnight) a huge consideration in commerce, KMK urges its clients and all business entities to review the force majeure provisions in their contracts to determine whether they need to be improved on a going-forward basis. Please let us know if you would like our assistance in that regard.
Impracticability, Impossibility and Frustration of Purpose
Even if a contracting party does not have a force majeure provision that it may invoke, there are other potential legal avenues (although often requiring difficult proof) to suspend or limit performance.
When the sale of goods is involved, the Uniform Commercial Code (UCC) provides a justification of Impracticability—where delivering goods as agreed would be impracticable due to an occurrence that the parties assumed would not occur. This is a high standard to meet, as the seller must not have assumed the risk of the occurrence, must have acted in good faith and cannot rely on a mere increase in cost to justify nonperformance. Reasonable allocation of available goods among customers may be required as well.
The doctrine of Impossibility provides a closely related justification for nonperformance but is not limited to the sale of goods. Intervening events must render performance impossible. That is something very difficult to show; in essence, the basic fabric of the contract must have been destroyed through no fault of the party. The mere loss of profitability or increased difficulty in performance is not enough.
Another doctrine, Frustration of Purpose, calls for a similarly high level of proof. In order to excuse its performance, a party first must show the principal purpose of its contract, and then establish that through no fault of its own, that purpose has been substantially frustrated due to an event that the parties did not assume or foresee. Again, this calls for a legal analysis that carefully evaluates the nature of the agreement and the effect of the event in question (here, COVID-19) on the contract.
Consider these key takeaways to assist you:
- Know your rights! Promptly evaluate your existing agreements for force majeure clauses and their requirements in the face of COVID-19. Look for ways to strengthen your force majeure provisions for use in future agreements. Bear in mind that other legal doctrines can accomplish the same result as a force majeure clause if special requirements are satisfied.
- Focus on the long-term view when feasible. Consider whether the first step in dealing with your valued suppliers and customers should be to negotiate around or mediate COVID-19 problems. Litigation related to COVID-19 issues may be expensive and the results uncertain. But while you negotiate, make sure you reserve all your rights and make no admissions that could be used against you if the dispute later ends up in court or arbitration.
- Review your insurance policies for business interruption protections, both for your company’s losses and for potential claims that might be brought against you by your contracting parties due to COVID-19.
We appreciate the difficult situations you may be facing and the many considerations that arise when your business is placed in jeopardy because of COVID-19 and its all-encompassing effects. KMK is here to help you navigate through whatever issues you may be facing regarding your contractual and business relationships. For more information about this topic and other matters related to business litigation, please contact Robert L. Gegios via email or call the firm’s main office at 414-962-5110.
Founded in 1937, Kohner, Mann & Kailas, S.C. (KMK) is a leading law firm with a global reputation for success and a rich tradition of results, providing legal expertise in business and financial services, business litigation, and commercial collections. Recognized by U.S. News & World Report as one of the nation’s Best Law Firms, KMK is headquartered in Milwaukee, WI. For more information, visit www.kmksc.com.