By the Department of Consumer and Business Affairs in partnership with Bet Tzedek Legal Services
COVID-19 has adversely impacted the ability of many individuals and businesses to perform their obligations under existing business contracts. If COVID-19 has interfered with a party’s contract performance, this may impact the contracting parties’ other rights and obligations under the contract, including payment obligations. For example, if a small catering business entered into a contract to provide catering services for a live event, and that event was cancelled due to COVID-19, the caterer might no longer be required to provide the catering services, and the party who hired the caterer might no longer be required to pay for those services. Ultimately, the rights of each contracting party will depend on the facts of the situation and the specific language in the underlying contract.
The following sections provide some general tips about how contract language can impact the outcome of this analysis. If COVID-19 has interfered with your business contract or if you are entering into a new contract, you should seek the advice of a qualified attorney to determine your rights and the best strategies for addressing COVID-19 in your particular situation.
1. Force Majeure Provisions
Some contracts contain a “force majeure” provision, which may limit or alter a party’s liability or obligations if they are unable to perform under the contract due to unforeseeable circumstances. Whether the COVID-19 pandemic qualifies as a force majeure event will depend on the specific language of the provision and which State’s law applies to the contract. For instance, a force majeure provision that explicitly lists health-related events such as “pandemics” is more likely to apply in the context of COVID-19.
Importantly, every force majeure provision is different, including with respect to the types of relief they offer. For example, some provisions might allow you to delay your performance of the contract due to COVID-19, while others might allow you to back out of the contract completely. Force majeure provisions also often require that the party seeking to invoke the provision give advance notice to the other party. If your existing contract contains a force majeure provision, you should carefully review it with the help of an attorney to determine whether it might apply to any contract issues caused by COVID-19. Additionally, if the language of a force majeure provision in your contract is unclear, an attorney may be able to help you revise that language to better clarify how the provision applies to the COVID-19 pandemic.
2. Common Law Doctrines
If your contract does not contain a force majeure provision, the common law doctrines of impossibility, impracticability or frustration of purpose might still apply. Under the impossibility and impracticability doctrines, courts will sometimes excuse a party’s performance under a contract if unforeseen circumstances like COVID-19 make such performance impossible or unreasonably difficult or expensive. Under the frustration of purpose doctrine, courts will sometimes excuse performance if unforeseen circumstances have interfered with the underlying purpose of the contract. You should seek the advice of an attorney to determine whether these doctrines apply to your situation. This analysis will depend on the specific facts of your situation and which state’s law applies to your contract, although courts are generally reluctant to provide relief without a clear contractual provision.
3. Tips for Negotiating New Contracts
Always seek the advice of a qualified attorney before negotiating or entering into a new business contract. If you have particular concerns about how COVID-19 might impact your or your counterparty’s ability to perform under a proposed contract, you should discuss this with your attorney and work with them to negotiate contract language (e.g., a properly tailored force majeure provision) to help address your concerns. You should also discuss any COVID-19 concerns with the other party or parties to your proposed contract. Because COVID-19 creates uncertainty for all contracting parties, it can be mutually beneficial to negotiate contract language to clarify the parties’ rights and obligations in the event that COVID-19 interferes with performance of the contract.
