COVID-19 and Contract Performance

by | Mar 23, 2020

Businesses large and small have been placed under tremendous financial strain due the current pandemic.  Government action at all levels seeking to address the issue are advancing and changing by the hour.  Some of these will offer small businesses some relief.  Others, such as proposals requiring paid sick leave to hourly workers, may increase the burden.  Moreover, the strain is being felt not just by your business, but also by your vendors and customers.

In light of all of this, it is imperative to assess the obligation of continued performance under your various contracts.  Do your vendors have an obligation to continue to provide you with goods and services?  Do you have an obligation to continue to provide goods and services to your customers?  What about paying rent and making loan payments?

Many commercial contracts contain a so-called “force majeure” clause.  Force majeure is an event that cannot be reasonably protected against.  A typical force majeure clause includes thing such as “acts of God,” including natural disasters such hurricanes, tornadoes, floods, and earthquakes, as well as events such as acts of government, war, terrorist acts, and labor strikes.  It is unusual to see “pandemic” expressly among the list of force majeure events, but the underlying concept is that a force majeure event outside of a party’s control which makes performance impossible, inadvisable, commercially impractical, or illegal.  We think very few people would disagree that the COVID-19 pandemic meets the definition of force majeure.

The occurrence of a force majeure event will have two common results.  At a minimum, it temporarily excuses performance so that affected party’s failure to perform does not result in a breach of contract, provided that the affected party uses reasonable efforts to mitigate the delay.  However, many force majeure clauses allow the non-affected party the right to cancel the contract if the affected party’s performance continues beyond a certain period of time. 

Force majeure does not, however, excuse a party’s obligation to pay money.  Thus, the disruption caused by a COVID-19-based near economic shutdown will not excuse your obligation to pay rent to your landlord or make loan payments to your lender.  Moreover, business interruption insurance typically applies to disruptions caused by natural disasters.  It is not likely to cover a general economic slowdown, no matter the cause.

However, you are not helpless.  Now is the time to look at crucial contracts, and to talk to legal counsel if you are unsure of your rights and obligations.  In addition, there has never been a better time to communicate with stakeholders.  Your employees, vendors, customers, landlords, and lenders must all know that you have assessed the situation and have a plan to proceed as best as possible.

For more information, please contact Leonard Gambino at leonard.gambino@sfnr.com

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