CORONAVIRUS KILLED MY CONTRACT. NOW WHAT?
Updated: Feb 15, 2021
Brief Overview of Coronavirus
Coronavirus disease 2019, or COVID-19, is a respiratory disease affecting the young, old, meek, and the bold. It is spreading like rapid fire. As of March 11, 2020, the World Health Organization declared pandemic (disease prevalent over a whole country or world). Here’s a visual:
Different parts of the United States are seeing different levels of coronavirus activity and have implemented varying responses. Many states started requiring businesses to close their doors to the public in hopes to stop the spread of this horrid virus.
Besides its devastating health implications, COVID-19 also creates severe economic hardship for people and businesses. States like Ohio have attempted to mitigate such hardships for small businesses and non-profit organizations by working with the federal government to allow small businesses and non-profits to apply for low-interest loans to pay for certain expenses caused by coronavirus. One question remains that your politicians cannot answer for you (but your lawyer can), are you still obligated to perform under the contract you signed?
Breach of Contracts Due to the Coronavirus Pandemic.
One thing that virtually all businesses have in common is that they all operate in accordance with contracts they have signed. The spread of coronavirus is going to have significant legal implications on businesses, because contracts are going to be breached. The big issue for all these businesses is whether performance is excused or postponed without liability to the breaching party, and who is ultimately liable for any damages that result from breached contracts.
To determine what your risk is, dust off those contracts you thought you’d never look at again and check if you have a Force Majeure Clause… or ask GK Law Co. to do it for you >> www.Gklawco.com
Contains a Force Majeure Clause
A Force Majeure Clause is a contract provision that relieves parties from performing their obligations when unforeseen circumstances arise, making performance inadvisable, commercially impracticable, illegal, or impossible.
This type of provision is usually buried alongside standard terms towards the end of agreement. Force majeure provisions excuse performance, not monetary obligations (e.g., payment of rent, earnest deposits, etc.). Some clauses require the party claiming delay or failure to perform due to a force majeure event to notify the other in a specific manner.
A Force Majeure Clause is not always enforceable. Courts look to several elements when deciding whether or not to enforce this clause, like: (1) whether the event qualifies as force majeure under the contract, (2) whether the risk of nonperformance was foreseeable and able to be mitigated and (3) whether performance is truly impossible.
Does Not Contain Force Majeure
If your contract is silent as to force majeure, the courts in your jurisdiction will determine whether to excuse performance. Most courts will excuse a breach of contract if an unforeseeable event makes performance impracticable, also known as the “Default Rule”. A Force Majeure clause overrides the Default Rule. So, if a contract does not have a force majeure clause a party breaching that contract due to coronavirus-related issues will almost certainly rely on the Default Rule to excuse performance. The likelihood of prevailing under the Default Rule will depend on the facts of your case.
Business Interruption Insurance
Business interruption insurance is intended to cover losses resulting from interruptions to a business’s operations, and generally covers lost revenue, fixed expenses such as rent and utility, or expenses from operating from a temporary location.
While these policies most frequently relate to physical property damage, businesses should still proactively assess their coverage to determine whether they might be covered for losses due to business interruptions resulting from coronavirus. Additionally, courts may look to the governing state’s law in determining whether recoupment is possible under such policies (as opposed to factual circumstances). It is important to understand local statutes or precedents in making any insurance claims.
Purchase and sale agreements typically allocate significant financial, business feasibility and property condition risks (including tenant stability) to the buyer. Most buyers will seek to mitigate this risk by including material adverse change (MAC) clauses in these contracts that give the buyer an “out” where certain circumstances occur resulting in a material or adverse change to the condition of the property prior to closing.
MAC Clauses are typically not tied to adverse global economic conditions, but if you are a seller in a contract currently being negotiated with a MAC Clause, it would be beneficial to preemptively carve-out the impacts of coronavirus. Similar to force majeure clauses, the validity of MAC Clauses can ultimately end up being determined by litigation.
As always, this is for educational use only and is not intended to serve as legal advice. If you are an Ohio entity, GK Law Co. can help you:
1-Evaluate the impact of coronavirus on your business and contractual obligations.
2- Include coronavirus language in your current force majeure provisions, or with a force majeure claim.
3- Review your insurance policies to determine whether business interruptions relating to the coronavirus are covered by your insurance carriers and review any notice requirements tied to making any claims, as well as analyze your state’s laws in the event you seek coverage.
4- Negotiate a contract to specifically address coronavirus considerations in your force majeure provisions, insurance provisions or purchase agreements generally.