Breach of Contract During COVID-19 Outbreak? Better Dust Off Your Agreements

Breach of Contract During COVID-19 Outbreak? Better Dust Off Your Agreements

Force majeure clauses and common law remedies could help businesses that can’t meet contract obligations. But no agreement is the same.

As the global outbreak of coronavirus brings the American economy to a halt, countless companies will undoubtedly have trouble meeting their contractual obligations. But there are a few legal options that may help businesses avoid headaches down the road.

Many contracts often include force majeure provisions, which excuse poor performance under exceptional circumstances. A global pandemic would likely qualify for many agreements, but it’s worth taking a second look at contract language in any case, legal experts say.

“We are being inundated with these questions,” said Matt Levy, a partner in the Indianapolis office of Faegre Drinker. “There are emails going across essentially all day from clients asking for advice.”

As with most legal issues, there’s not really a one-size-fits-all answer. Force majeure provisions vary company to company and industry to industry, but generally speaking, they’re pulled out when something happens beyond either parties’ control. Some businesses have relied on force majeure provisions during work outages caused by striking workers or unprecedented weather conditions, said Jonathan Bye, a Ballard Spahr LLP attorney who’s worked on breach-of-contract cases for more than 30 years.

“I suspect that, given the publicity of coronavirus, courts are going to be more willing to consider force majeure clause defenses than they would be in a sort of ‘one-off’ situation,” Bye said.

During any breach of contract, communication and documentation should be the first steps. For instance, suppliers should inform their customers — in writing — that they’ll be unable to provide the agreed-upon goods. “Over-communicating” is how one lawyer put it.

“We have a bit of a habit when we’re talking about litigation of keeping our cards close to the vest,” said Dan Brown, partner with Minneapolis-based Dorsey & Whitney LLP. “I would say that in a situation like this, you’re better off not doing that. Get out in front of these issues by communicating with your counterpart, telling them exactly what’s going on.”

If your contract doesn’t include a force majeure provision, you may not be totally out of luck. The Uniform Commercial Code, a set of laws governing sales contracts, does provide a similar clause for sellers.

“If you are a seller of goods and your contract is governed by U.S. law or Minnesota law, you may have some rights to claim force majeure by statute, but they might be more limited than what you put in a contract,” said Faegre Drinker’s Levy.

It’s worth noting that the Uniform Commercial Code’s force majeure provision only applies to sellers of goods, not services.

But common law may provide some other remedies, too. If it becomes illegal for companies to continue providing goods or services — say, when the governor mandates the closure of all bars and restaurants — they may seek some relief through common law. Companies may also have a valid reason to break a contract if it becomes impractical to continue business.

“Impractical doesn’t just mean a little more expensive or a little more difficult. It would have to be something that’s excessively or unreasonably burdensome,” Levy said.

Whatever legal avenue a company pursues, it’s wise to keep lines of communication open. And, of course, businesses should exhaust all other options before claiming force majeure.

“At the end of the day, you want to retain the relationship with your customer or whoever you have a contract with,” Levy said. “The parties should be taking every step to get out ahead of whatever’s happening and find reasonable commercial solutions.”