Implications for Business Contracts in The Wake of Covid-19

As everyone’s lives are upended due to the coronavirus pandemic sweeping every corner of the world, business as usual seems almost impossible. For example, what about that seemingly rock-solid business contract you signed last fall? Performing as specified under it seems almost impossible now. So, what are business owners and managers like you supposed to do? To provide a bit of guidance in these uncertain times, we have put together a list of items you could consider in order to help you make it through this economic downturn.

FORCE MAJEURE CLAUSE

This is likely the most common contract provision to be activated by businesses during the COVID-19 pandemic. A force majeure clause addresses acts of “God” and other major, drastic interruptions to business operations. It might also include government orders that make it infeasible to perform. Go back over what your contracts include about this provision; even if yours included it, there is a chance it might not be worded to apply to the current situation.

The specific language of force majeure provisions differs, but to be enforced, the cause of the provision must be:

UNFORESEEABLE

Stemming from circumstances completely outside the control of the contract’s parties; a result of a situation apart from any party’s negligence or willful misconduct.

COULD COMMON LAW DOCTRINE SAVE YOU?

Let’s hypothesize and say there is no provision in your business contracts that provides a way out for everyone involved. If that is indeed the case (your attorney should verify this), then there might be a way that you are excused from having to perform under the contract.

Three doctrines from common law that might prove relevant are:

• Impracticability: This doctrine may be successfully used when performance of a contract is, simply, unfeasible.
• Impossibility: The doctrine of impossibility has similar features to impracticability; however, if the impossibility doctrine is used successfully, then a party to a contract has shown that performance as stipulated in the underlying contract was effectively impossible.
• Frustration of Purpose: Finally, the frustration of purpose doctrine is a legal tool that may be attempted when an unforeseen situation destroys one party’s main reason for entering into the contract in the first place.

INSURANCE COVERAGE

If your business has not found any recourse above, you should review your business insurance policies to determine if you are covered for financial losses related to COVID-19. If your business is covered, the policy typically will require you to give prompt notice to the insurer to take steps to mitigate your loss.

HOW CAN YOU STRUCTURE YOUR CONTRACTS IN THE WAKE OF COVID-19

One piece of advice that has always been applicable to business contracts but is abundantly relevant now is to write thorough contracts – leave no stone unturned. Purchase insurance that will compensate if one party or another doesn’t perform. An ounce of prevention is worth a pound of cure.

CONCLUSION

You and many other entrepreneurs and managers will find it difficult, if not impossible, to satisfy terms of your business contracts going forward. Fortunately, there are ways to potentially alleviate these situations. To accomplish this, you need to speak promptly with your lawyer and chart out a path forward.

The Browne Firm is here to help. Contact us online or call (914) 290-5622 to discover what we can do for you.