Contract Performace in the Wake of COVID-19
With the COVID-19 pandemic, parties can expect contract rights, obligations, and remedies to be impacted. Individuals are being self-quarantined to prevent risk of exposure and facilities are being closed. As a result, parties are forced to determine whether they are obligated to perform under their contracts, or whether they can invoke a force majeure provision to excuse their performance, temporarily or permanently.
Many contracts include force majeure provisions, which excuse one or both parties’ performance obligations when unforeseeable circumstances beyond the parties’ control arise and make performance of the contract impractical or impossible. These provisions usually refer to events such as natural disasters, war, acts of terrorism, strikes, labor disputes, and disease. It is important to note the relevant force majeure event need not be COVID-19 itself; rather it is the consequences of COVID-19 and its impact on a party to fulfill its contractual obligations that will be relevant. A global pandemic, like COVID-19, will qualify as a force majeure event for many contracts. However, all contracts are different and whether a force majeure provision can be invoked is a fact intensive inquiry.
When reviewing contractual rights and responsibilities, a party should identify any force majeure rights, remedies, and requirements. For example, many contracts impose notice requirements on the party invoking the provision that may necessitate certain performance, including:
- Providing timely notice that the force majeure event has impacted performance;
- Documenting delays and costs experienced due to the force majeure event; and
- Taking reasonable steps to mitigate the impact.
A party relying upon a force majeure provision must show it has taken reasonable steps to avoid or mitigate the event and its consequences, including but not limited to, communicating as early as practicable concerns of performing under the contract. Moreover, the party must show there are no alternative means for fulfilling the terms of the contract. Evaluating reasonable mitigation is fact specific and will depend upon the nature of the contract at issue.
Businesses and individuals with contracts affected by COVID-19 should take the following steps:
- Review contracts to identify any force majeure rights, remedies, and requirements that may apply if a party’s performance is disrupted by the effects of COVID-19.
- Identify any and all notice requirements that may have been triggered by COVID-19. For example, a party may be required to provide written notice to other parties to the contract, within a specific time period.
- Before invoking a force majeure provision, parties should consider and document alternative means of performance and steps that may be taken to avoid or reduce performance disruptions.
- Identify the consequences of a breaching or defaulting under the contract.
In the absence of an applicable force majeure provision, or as an alternative, a party may be excused from fulfilling the terms of the contract by claiming impossibility or impracticability. Where a party’s performance is made impracticable by the occurrence of an event outside the party’s control, contract duties may be discharged. For a party’s performance to be truly impracticable, the event must be unforeseeable and not caused by the party expected to perform. Moreover, the Uniform Commercial Code governs contracts for the sale of goods and may afford force majeure rights to sellers.
If you have questions related to contract law, your rights, obligations or remedies, we’re here to help. Contact Parker Daniels Kibort at 612.355.4100.