The coronavirus pandemic and resulting government regulations will cause many businesses to breach their commercial contracts or, at a minimum, will make it much more difficult and expensive to fulfill their contractual obligations.
As the coronavirus outbreaks continues to cause a massive disruption in the U.S. economy, with thousands of businesses shut down or unable to continue business as usual, many businesses have been unable to perform on their contracts with vendors, buyers, and clients.
Breach of contract cases will only increase as the crisis worsens. We will likely see these cases take different forms, such as:
- Suppliers unable to satisfy orders for buyers based on shortages, problems in the supply chain, or increased prices based on scarcity;
- Buyers in long-term contracts unable to continue paying suppliers for shipments of goods, either because the coronavirus outbreak has hurt revenue or they cannot operate due to government regulations;
- Breaches based on government regulations explicitly prohibiting one or bother of parties from performing their end of the bargain, including orders shutting down “non-essential” businesses;
- Breaches based on the coronavirus outbreak and resulting regulations making it impractical or impossible for one or both of the parties to perform their end of the bargain;
- Commercial tenants unable to pay rent or pay their mortgage due to the factors listed above;
- Parties unable to meet their contractual obligation due to coronavirus outbreaks negatively impacting their labor supply, either because of infections or stay-at-home orders.
Is the coronavirus outbreak a defense for parties accused of breaching a commercial contract?
In some cases, parties that breach a contract due to the coronavirus outbreak may have a valid defense that excuses their failure to fulfill their contractual obligations. Whether a party has to pay damages for breaching a contract or is excused from performing usually boils down to the specific language in the contract. Several contracts have terms that specifically address what kinds of actions will constitute a breach of contract, when a breach is excusable, and how the parties can seek damages when there is a breach.
If the contract has a “force majeure” clause, the breaching party can argue that the clause has been triggered and their failure to perform is excused. Force majeure clauses generally excuse a party’s failure to perform if certain unforeseeable events occur that prevent one or both of the parties from fulfilling their end of the bargain. Events that trigger force majeure clauses often include fires, criminal damage, natural disasters, “acts of God,” and other events specifically addressed in the language of the contract. In the context of the coronavirus outbreak, some parties may breach the contract and argue that the outbreak and/or resulting government regulations are force majeure incidents excusing their breach.
Other common law doctrines may allow a party to breach the contract. Under the common law doctrines of “impossibility” and “frustration of purpose,” businesses may be able to argue that the coronavirus outbreak has made their contracts impossible to perform or that conditions have changed so dramatically that the original purpose of the contract is no longer achievable or relevant under the circumstances.
A contract may also have specific language that allows parties to back out, terminate the contract, or forgive a breach, especially if the contract is between companies in an industry that is unpredictable or where breaches are common. A relevant example of these terms would be a provision excusing a party’s failure to perform due to a “civil authority,” such as government shut down orders, or if certain conditions in the market occur, including changes in supply and demand.
A party can also argue that, even if they did breach the contract or if the contract excuses the other party from performing, the contract is a contract of adhesion, meaning that the contract was simply based on boiler plate language that one of the parties had to accept because of their weaker bargaining position. In some cases, certain provisions in the contract may be voided by courts based on the parties having unequal bargaining power or because the provisions are fundamentally unfair.
How can businesses negatively impacted by a breach of contract be made whole again?
While you can almost always seek compensation for a breach of contract, sometimes the language of the contract limits the available remedies. For example, some contracts make the parties litigate alleged breaches through an arbitrator or mediator, while expressly prohibiting the parties from filing a contract in court. A contract may also specify certain conditions that must be met before one of the parties can claim that the contract has been breached and seek damages, such as notice requirements or a condition that the breaching party be given an opportunity to fix the breach.
Have an attorney review your contract and help you come up with a plan.
According to the projections of public health experts, the coronavirus will continue to spread for several months. In light of the changed economic landscape, some parties may be able to renegotiate and modify their contracts to accommodate for the coronavirus’s effects on labor and the market. In some cases, this may be in both parties’ interests and can be facilitated through experienced contract attorneys.
In other cases, however, it may take a lawsuit and going to court to be made whole or to avoid being found responsible for breaching a contract, especially if one of the parties’ failure to perform their end of the contract significantly harms the other party’s ability to continue operating its business or if the contract heavily penalizes breaches. Some of these cases may be resolved through negotiating a modified contract or a settlement agreement that releases the parties from their remaining contractual obligations. If the stakes are high and neither party can agree on a remedy, there may have to be a trial.
Regardless of whether you are looking to re-negotiate your contract, get out of your contract, or seek compensation because your contract has been breached by the other party, our experienced lawyers are ready to review your contract and explain your options. Contact us to learn more.
