April 1, 2020
Marc A. Menkveld
Member, Stoll Keenon Ogden PLLC
Nealy R. Williams
Attorney, Stoll Keenon Ogden PLLC
Attorney, Stoll Keenon Ogden PLLC
The COVID-19 crisis will undoubtedly impact the ability of businesses to fulfill their obligations under existing contracts. The World Health Organization has declared the COVID-19 virus a global pandemic. The Federal Government has declared a National Emergency concerning the Outbreak of COVID-19, and state and local bodies have issued further emergency orders, often enforcing increased restrictive measures to combat the virus. Supply chains have been disrupted and many businesses have been brought to a standstill. Under these circumstances, business owners are questioning whether nonperformance of contractual obligations may be excused. While the spread of the virus and the extent it will have on various industries is still uncertain, it is likely that businesses and industries will be presented with circumstances that require them to review and potentially reassess their various contractual relationships.
Businesses preparing for this eventuality should become familiar with legal principles that excuse a party’s nonperformance of contractual obligations. Excusing nonperformance due to unforeseeable circumstances is generally contemplated in three overarching areas of law: (1) force majeure clauses; (2) Uniform Commercial Code provisions; and (3) common law. Below is a brief overview of each.
Force Majeure clauses
Parties to a contract are free to outline events that would excuse performance of their contractual obligations due to unforeseen circumstances that are beyond their control. To this end, many contracts include force majeure provisions that exclude performance upon the happening of an event identified in the contract. Familiar examples include acts of God, war, riots, civil insurrection, acts of the public enemy, strikes, lockouts, fires, explosions, floods, governmental orders, and/or governmental regulations, etc. These provisions identify instances, sometimes specific; sometimes broad, where a party’s performance is excused due to unforeseeable circumstances beyond the parties’ control.
Things to look for under these provisions include: the scope of the force majeure provision; whether there is a notice provision that obligates a party to provide notice, generally seasonably notice, to the other party that it will not be able to perform due to the extraordinary event; whether there is a mitigation provision; and whether there are other terms in the contract that are impacted by enforcing the force majeure provision.
These provisions are as varied as the industries affected by the current pandemic. There is no single analysis that applies to all force majeure provisions. A close reading and analysis of your force majeure provisions is a necessary effort to determine your contractual rights and obligations in the wake of COVID-19.
In the absence of a force majeure provision, there are other legal options available to parties who cannot perform contractual obligations due to an extraordinary event.
Uniform Commercial Code
All 50 states in the United States have adopted some form of the Uniform Commercial Code (“UCC”). The UCC regulates and facilitates commercial transactions for the sale of goods. The sale of automobiles, for example, fall within the purview of the respective commercial codes adopted in Kentucky and Indiana. Specifically, the UCC includes commercial impracticability doctrine that provides relief to suppliers when there is a delay in delivery or non-delivery in whole, or in part, if the performance has been made impracticable by the occurrence of an event in which the nonoccurrence of the event was a basic assumption on which the contract was made. In other words, the purpose of this section excuses a party from timely delivery of goods, where her performance has become commercially impracticable because of unforeseen supervening circumstances not in contemplation of the parties at the time of contracting.
Common Law Frustration of Purpose/Commercial Impossibility:
In certain circumstances where the UCC is not applicable, a party may also seek relief from its contractual obligations under common law doctrines. Most U.S. states recognize the doctrines of frustration of purpose or commercial impossibility/impracticability, or a variation thereof. These doctrines provide a mechanism to excuse nonperformance of a contract under certain circumstances. While these doctrines are not typically invoked, these are not typical times. Relief may be available when the total or nearly total destruction of the purpose for which both parties contemplated when entering into the transaction, or where performance under a contract becomes truly impossible, or sometimes, commercially impracticable.
There is no single analysis that covers every scenario. Each doctrine discussed above requires a fact-sensitive inquiry into the idiosyncrasies that led to the nonperformance of contractual obligations.
The time to review existing contracts has come. Businesses are well-advised to determine whether performance is likely. If not, they must be prepared to deal with the fallout by understanding the legal protections available to them. Maintaining an open dialogue between contracting parties aimed at amending or suspending certain aspects of agreements to maintain important business relationships is a worthwhile endeavor. In some instances, litigation may be necessary to resolve contractual disputes. Regardless of the situation, businesses must begin considering the legal implications that COVID-19 will have on their contractual expectations.
Attorneys practicing business law at Stoll Keenon Ogden PLLC would be happy to help assist companies with their contractual issues.
Stoll Keenon Ogden understands that these are trying times for our clients and our country. Our firm operations have continued uninterrupted and our attorneys are equipped to serve as we always have – for more than 120 years.
Please also be sure to check out the Stoll Keenon Ogden Coronavirus Resource webpage for additional articles and information related to the latest information on new laws and directives enacted by federal, state, and local governments in response to the Coronavirus pandemic.