Contract Breaches During the Novel Coronavirus Pandemic: Potential Claims and Defenses
As the novel coronavirus (COVID-19) pandemic continues to impact companies across the nation, many are being forced to grapple with difficult questions concerning contractual performance and liability.
Dealing with contractual issues is a fact of doing business. Suppliers fail to deliver on time. Clients, customers, licensees, and lessees get behind on their payment obligations or claim that your company has failed to meet its obligations. These types of issues arise all the time; and, when they do, companies must decide whether and to what extent to take legal action.
But, as with just about everything else, as the novel coronavirus (COVID-19) maintains its grip on the United States and much of the rest of the world, companies are finding that contractual disputes are becoming very different. Increasingly, companies are failing to perform simply because they have no other option. Either the novel coronavirus has made performance impossible, or companies are simply running out of money because the government has forced them (or their customers) to shut their doors.
Dealing with a Breach of Contract During the COVID-19 Outbreak
Also similar to many other aspects of dealing with the COVID-19 outbreak, dealing with a breach of contract involves a mix of financial, legal, and practical considerations. Even if your company has grounds to initiate litigation or move forward with terminating a contract due to a material default, the fact that this option is available does not necessarily mean that it is the best course of action. While financial constraints may dictate certain outcomes for both parties in some cases, in many instances, companies will likely find that negotiating a mutually-agreeable resolution focused on the long-term will better serve the interests of everyone involved.
When Might a Contract Breach Be Excused Due to the Novel Coronavirus (COVID-19) Pandemic?
One question that is being raised frequently in various contexts is the question of when contractual non-performance is excused due to the novel coronavirus (COVID-19) pandemic. Speaking in very general terms, a contract breach may be excused due to the following:
- Force Majeure – A typical “boilerplate” provision that rarely gets negotiated and even more rarely gets exercised, a force majeure clause excuses a contract party from performing if it is unable to do so due to factors beyond its control. These provisions can vary widely in their specificity, with some expressly excusing performance for pandemics and national emergencies.
- Illegality – As we discuss in greater detail below, the government’s enactment of legislation prohibiting businesses from engaging in certain activities may make it illegal for some contracting parties to perform. If contract performance would be illegal, it will often be excused.
- Impossibility of Performance – Some contract breaches may be excused during the novel coronavirus pandemic due to impossibility of performance. This is similar in certain respects to force majeure, although the specific terms of the parties’ agreement (and their agreement’s governing law) will determine whether and to what extent non-performance is excused.
- Uniform Commercial Code (UCC) Protections – For sale and lease agreements governed by the Uniform Commercial Code (UCC), various provisions of the UCC have the potential to be relevant. This includes sections that excuse non-performance when an unanticipated contingency affects a basic assumption underlying the contract and when non-performance is due to good-faith compliance with a government order.
- Contract Contingencies – Additionally, in certain circumstances the novel coronavirus pandemic may either trigger a contractual contingency or prevent a contingency from being realized. In either scenario, the practical impact may be that one or both parties’ non-performance is excused.
How Does the Government’s Response to the COVID-19 Outbreak Restrict the Options that are Available to Businesses?
This is an important question, and right now the answer is changing on almost a daily basis. For some companies, contract performance may be prohibited or impossible under the laws that the federal government and state legislatures across the country are enacting in response to the novel coronavirus pandemic. If employees are prohibited from going to work and they are not capable of performing their job duties from home, then a contracting party may have one or more of the defenses we listed above.
Companies can run into legal and regulatory challenges under various other circumstances as well. For example, if a company is forced to provide materials or supplies to the federal government under the Defense Production Act, then it may have a legal obligation to fulfill the government’s orders prior to performing under its preexisting commercial agreements. As the situation continues to evolve, in order to maintain legal compliance during the COVID-19 outbreak, companies will need to ensure that they remain abreast of all pertinent legal and regulatory developments.
When Should a Company Move Forward with Contract Enforcement and/or Termination During the Novel Coronavirus Pandemic?
Let’s say that one of your company’s counterparties has breached an agreement during the novel coronavirus pandemic, and let’s assume that none of the defenses or governmental issues we discussed above apply. Maybe a lessee or licensee has simply run out of money, or maybe the breach has nothing at all to do with the pandemic. Whatever the case may be, your company has been harmed, and it is contractually entitled to seek legal remedies. Should it do so?
While, under normal circumstances, the answer to this question might be relatively straightforward, in the midst of the novel coronavirus pandemic there are a number of unique issues that may warrant consideration. Ultimately, private and public companies must do what is in their shareholders’ best interests; but, whether this means terminating a contract at the present time is a question that requires careful examination of the specific circumstances at hand.
For example, while it may not make financial sense in the short term to maintain a relationship with a customer who cannot afford to pay, if the customer is likely to regain its financial standing in the future, then it may ultimately be better to work out a short-term resolution in lieu of terminating the contract and moving on. These are truly unprecedented times, and companies need to take this into account when deciding whether to pursue contractual remedies for short-term non-performance.
Additional Considerations for Dealing with Contractual Non-Performance During the Novel Coronavirus (COVID-19) Pandemic
In addition to the above considerations, there are various other factors that companies may want to factor into their decision-making processes during the novel coronavirus (COVID-19) pandemic as well. Some non-exclusive examples of these factors include:
- How essential is the contract to the company’s core business? Aside from short-term cash flow considerations, what will be the impact on the company’s core business if the contract is terminated or lost? This is an important question for both supplier-side and customer-facing agreements. If an agreement is essential to the company’s core business and it can be saved through strategic deal-making, then exploring potential creative solutions may be the better option.
- Do long-term considerations outweigh immediate interests? In this same vein, is it in the company’s long-term best interests to try to save the relationship? At this point, pretty much everyone understands that the novel coronavirus pandemic is affecting companies of all sizes and in all industries in unique ways. If it makes sense to sacrifice now in order to serve the company’s long-term objectives, then this is the course of action that should be pursued.
- Could termination or other legal action have negative consequences for the company’s brand or reputation? In today’s world, the one thing that hasn’t seemed to slow down due to the COVID-19 outbreak is social media. If your company terminates a contract during the COVID-19 outbreak resulting in the loss of jobs or negative impacts for consumers, is there a risk that this could lead to significant loss of brand value or reputational harm? If so, then alternate solutions may need to be put on the table.
- Are alternate suppliers or other contracting parties available during the pandemic? If your company terminates a contract or pursues other legal remedies for non-performance, what alternatives does it have available? Is there another, more financially-stable company that is prepared to deal? If there isn’t, this is a fact your company needs to know before it moves forward with any type of legal action.
- What does the future hold? Finally, while the United States and the entire world remain shrouded in a cloud of uncertainty due to the continuing spread of COVID-19, to the extent possible, companies need to try to prognosticate as to what the future holds. In order to make sound decisions with a long-term perspective, companies need to reach their own informed conclusions about what is best – and what is necessary – for protecting their bottom lines.
Speak with an Attorney at Oberheiden P.C.
Our attorneys and former federal agents are actively representing and advising companies nationwide with regard to contractual matters during the novel coronavirus pandemic. If you have questions or concerns and would like to discuss your company’s options in confidence, call 888-680-1745 or contact us online to arrange a complimentary initial consultation.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.