Can I Terminate a Contract Due To COVID?

COVID-19 has taken a toll on businesses of all sizes and stripes, from the smallest mom-and-pop corner shops to the multinational conglomerate. While some businesses have thrived in the “new normal” that COVID has foisted upon us, others have all but disappeared. Consider, for instance, the travel company forced to cancel its tours that were scheduled for Spring, Summer and Fall of 2020, or the concert venue booked for summer events and all the bands and orchestras with tours scheduled for 2020.

It’s hard to imagine a business that has not been impacted by the pandemic in some way. Even those businesses that are in high demand, like home improvement companies, have been having trouble with their supply chains, resulting in long fulfillment delays.

So what happens when you become a business that can’t deliver?

If you find yourself unable to complete your obligations under a contract due to COVID, you may have some protections, either by clauses in your existing contracts, or by concepts in the common law.

What is Force Majeure and When Does it Kick in?

Many standard contracts include “force majeure” clauses, which provide an excuse for not fulfilling a contract in cases where circumstances are beyond the parties’ control and could not be reasonably foreseen. Typically, the clause will spell out specific examples, which might include earthquakes, political unrest, nuclear contamination, or labor strikes.

Whether force majeure applies to a pandemic such as COVID will depend on the precise language used in the contract and the courts’ interpretations in the state whose rules apply. If the force majeure clause does not include “pandemic” or “epidemic” in its list of examples, it will be up to the courts to determine whether it should be considered.

Common Law Contract Relief

Even without a force majeure clause, under contract law, there are a few situations where parties might be excused from their obligations. The common-law doctrines of “frustration of purpose” and “impracticability” come into play when events transpire in such a way that makes the contract terms impossible or impractical to apply. Courts have been considering these concepts as they relate to COVID.

Impracticability

You may be able to escape liability if it would be “impracticable” to fulfill the terms of your contract. Impracticability occurs when three factors are in play:

• Something happens that was not contemplated at the time of the contract;
• Which makes performance of the contract much more difficult or expensive to complete; and
• The event must not have been reasonably foreseeable.

Frustration of Purpose

In cases where the original purpose of the contract becomes moot, parties to an agreement may be excused from specific performance, even if performance is technically possible. Imagine, for instance, forcing a band to perform at a wedding that was cancelled at a venue that is closed due to COVID restrictions. In situations like these, the original purpose of the contract has been frustrated and as such, many courts will agree to let parties off the hook.

The Bottom Line

If you are a business owner and you’re questioning whether you are still expected to perform even in light of seismic shifts in your industry, speak with a lawyer. Many contracts - and common law remedies - will excuse you from performing and can save you substantial financial strain (not to mention, a lot of stress and heartache). If you are in the process of bringing in new business, make sure you consult your attorney to ensure you include the proper protections - like a force majeure clause - in your agreements.