COVID-19: What Effect Does the Global Pandemic Have on Contract Rights and Obligations

By and
March 19, 2020

We are living in uncertain times as the effects of the COVID-19 virus pandemic and resulting governmental restrictions on economic activity and daily life take hold. Not surprisingly, many businesses are facing key decisions concerning their operations without a reasonable way to assess the impact. As businesses assess how their customer and supplier contracts are impacted by these turbulent times, there are some key principles to keep in mind.

Contract Terms – How Force Majeure Provisions May Apply

A force majeure provision in a contract allows contracting parties to delay or cease performance of contract obligations based on unusual and defined circumstances.

In assessing the obligations of a party to perform under its contract, as a first measure it is important to understand what the contract actually says. Courts have consistently stated that the words of the contract itself will determine the rights of the parties. As a general rule, e-mails, conversations and other information outside the “four corners” of the written agreement will not affect its interpretation.

Force majeure provisions are found in many commercial contracts, but the actual language of the provision itself will be important in determining whether there is an excuse that permits late performance or cancellation of the contract entirely. There is wide variation in the form these provisions can take.

For example, while most force majeure provisions will list a variety of specific conditions that would constitute a reason to excuse or delay performance, the force majeure provision may also include a “catch all” provision such as one that excuses performance in cases “beyond the reasonable control” of the delayed party or which contemplates excused performance in the case of an “Act of God.”

As a result, a force majeure provision that does not specifically identify “pandemic” or some other public health emergency as a specifically designated excuse for performance does not necessarily mean that contract performance would not be excused or permissibly delayed under some other identified clause in the force majeure provision.

Additionally, a key element in the force majeure provision may be the use of adjectives such as “extraordinary” or “unanticipated” to describe the conditions that would qualify to excuse or delay performance. As a general rule, and particularly in provisions where these types adjectives are used to modify the identified force majeure conditions, if the disruption involved could have been anticipated or foreseen, then it is less likely that performance will be excused or permissibly delayed.

Other Contract Terms May Be Implicated

However, disruptions to performance do not just involve a contract’s force majeure provisions. For example, commercial contracts often specify that payment obligations are never excused by a force majeure event. In that case, late payment penalties, termination rights, or liability for breach of contract may arise for a failure to make timely payment, even if an identified force majeure condition exists. It is important to review and evaluate the entire written agreement, and not just the force majeure provisions, to assess what impact interruptions may have on the contracting parties.

Non-Contract Considerations: Impossibility and Other Legal Theories

Even if a contract does not have a force majeure provision or the force majeure provision is not triggered, there are some legal principles that may apply in certain circumstances that affect contract performance. Concepts such as impossibility and similar legal principles can excuse performance even if the contract terms do not. However, these principles are generally limited to circumstances where the performance is literally impossible – for example, an agreement to deliver a specific one of a kind item becomes impossible when that one of a kind item is destroyed. The fact that performance becomes difficult or prohibitively expensive does not generally excuse performance under these legal theories.

What Law Applies

To make matters more complicated, each state has a body of law which may interpret the same contractual language in different ways. Commercial contracts will often select a “governing law,” in other words the contract will specify which state’s laws will apply to the interpretation and enforcement of the contract terms. In other cases, the contract is silent and legal rules about what state law is applicable will govern. International agreements will have even more complexity in this regard.

The determination of which law applies can make a difference in the interpretation and ultimately strategy in dealing with contract language. For example, many jurisdictions will read force majeure provisions and construe force majeure events narrowly to avoid undercutting the stability and predictability of commercial transactions. Others may approach this differently.

While the broad strokes may be similar, it is critically important to analyze not just the language in the contract and other legal principles affecting contract performance, but the state law that applies to that contract’s interpretation and enforcement.

Conclusion

Whether performance under a contract can be excused in unprecedented times like these is a question that will involve a careful review of the actual contract terms. While disputes may arise as the current situation resolves itself over time, the steps taken now by businesses will shape their current strategies and future prospects in contracting matters.

The team at Ruder Ware is ready to assist you and your business in assessing risks and strategies to deal with this uncertainty. For assistance, contact your Ruder Ware attorney today.

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Disclaimer

The content in the following blog posts is based upon the state of the law at the time of its original publication. As legal developments change quickly, the content in these blog posts may not remain accurate as laws change over time. None of the information contained in these publications is intended as legal advice or opinion relative to specific matters, facts, situations, or issues. You should not act upon the information in these blog posts without discussing your specific situation with legal counsel.

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