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Ask an Attorney: COVID-19 & Your Business

How does COVID-19 affect the contracts and leases I have signed over the years?

Many industries, especially customer service industries, have been materially affected by the various governmental restrictions put in place due to the ongoing COVID-19 pandemic.  The purpose of this paper is to, in broad terms, discuss several concepts of contract law that may address this situation.

All contracts are different, and every contractor will generally be bound by the terms of its particular contract or contracts.  In considering contract terms that generally address the current situation, most will be drawn to one of two clauses; a force majeure clause or a governmental moratorium clause.

Force majeure is a broad concept at law.  It is intended to address circumstances that were not reasonably foreseeable at the time of contracting, that are beyond the control of the parties, and that prevent performance of the contract.  However, force majeure is not implied at law.  If your contract does not contain a force majeure clause, or if it does not sufficiently address the current circumstances, with limited exceptions as addressed below, the law will not imply that you have the rights that a force majeure clause may confer.

Pertinent questions to ask are, when did you enter into the contract?  If you entered into or renewed your contract in the last 30-45 days, it is arguable that you could have foreseen this.  How is COVID-19 affecting your operations?  Various jurisdictions have varying restrictions in place.  Not all states have closed all schools, not all have made the restrictions applicable to private schools.  COVID-19 is not necessarily a force majeure depending on how it impacts your operations.

A governmental moratorium clause is more clear-cut, and addresses situations like the present, where performance is made impossible by government regulation that, either actually or effectively, prevents performance of the contract.

Finally, narrow exceptions to an express force majeure clause are the doctrines of impossibility and impracticability/frustration of purpose.  Whether or not your contract has a force majeure clause or some form of a governmental moratorium clause, the common law of almost every jurisdiction recognizes the concept of impossibility or, to a lesser degree, impracticability of performance and/or frustration of purpose of the contract.  The law of most states permits the excuse of contract performance if performance has been rendered impossible by intervening circumstances that were not reasonably foreseeable by the parties.  This is not an optimal legal argument to fall back on, most courts will not excuse your performance under a contract just because it’s more expensive or more difficult to do so.  However, it does provide certain protection in the event that you simply cannot perform your contracts anymore.

So what are your options, assuming one of the above concepts applies to your company?  That does very much turn on the contract.  Some contracts will allow for outright termination, others a suspension of performance until the intervening cause subsides.  Still others mandate performance to the greatest extent possible, and others allow for a good faith renegotiation of terms.

Remember, in general, neither party will want to terminate the contract.  Many institutions are operating at some limited capacity in any event.  The question then becomes, if you are able to negotiate a quick interim arrangement, how do you make sure it remains interim?

A few things to keep in mind: a) Check the notice provisions in your contract.  Even if your contract has one of the above clauses, there is often a duty to notify the other party within a certain time of your intent to rely on it.  Make sure you comply.  b) E-mails can form a contract or an amendment.  Everything is moving fast.  You may not be able to formalize an interim memorandum of understanding through traditional drafting.  If you offer a term, and the other side accepts, even by e-mail, it can be binding.  If you are not ready for a term to be accepted, make that clear, with disclaimer language such as FOR NEGOTIATON PURPOSES ONLY.  c) Define the end of the interim arrangement.  It may not be clear cut when the force majeure ends.  Is it when restrictions are lifted?  When classes resume?  A consideration is to put a 30-45 day self-effecting termination period in the agreement, such that the interim arrangement will end unless both parties agree to extend it.

These are some thoughts to keep in mind when navigating this difficult time.  Every situation is unique and resolutions will often be determined by the contract, by the relative bargaining power of the parties and by the strength of the existing relationships.

Be safe!

*NOTHING IN THE ABOVE COMMUNICATION IS INTENDED TO PROVIDE LEGAL ADVICE NOR RELIED UPON BY ANY READER AS EITHER CONSTITUTING LEGAL ADVICE NOR CREATING AN ATTORNEY-CLIENT RELATIONSHIP. PLEASE CONTACT ONE OF OUR ANNAPOLIS ATTORNEYS FOR MORE INFORMATION*