How Does COVID-19 Impact My Contractual Obligations?

In February, I wrote a blog post discussing force majeure clauses in commercial contracts. In brief, my original blog post stated, “Accordingly to my trusty Black’s Law Dictionary, ‘Such clause is common in construction contracts to protect the parties in the event that a part of the contract cannot be performed due to causes which are outside of the control of the parties and could not be avoided by exercise of due care. See also Act of God.’” At the time of that post, I certainly didn’t foresee how this issue could quickly evolve into one of the most important issues business owners must now address in relation to their contracts. If a business is shut down due to a pandemic and no income is coming in, is the business excused from meeting its contractual obligation? The answer is, of course, that it depends.

The first step for business owners is to consult with their attorney in regard to the specific language of the contract. What are the obligations that are not being met? What does the contract say about these obligations? What are the requisite procedures if there’s a contractual breach? What sort of notice must be given to the other party? Is there a force majeure clause in the contract? If so, what does it say? Does it clearly cover a pandemic? Or does it maybe, kind of, sort of cover a pandemic? Business owners need to understand their legal footing before they can proceed forward, and also need ensure that, to the extent that they are able to comply with the contract, they are doing so.

Depending on the terms of the contract and the relationship between the parties, business owners who are not able to comply with the contract may either wish to personally reach out to the other party and explain the circumstances, or alternatively, may ask their business attorney to correspond with the other party’s counsel in relation to the agreement. Or perhaps both approaches might be appropriate. Additionally, the contract may have provisions governing how to address unanticipated situations – such as a requirement for mediation.

The worst thing that any business owner can do is to put their head in the sand, not return the other parties’ calls and emails, and pretend that the uncomfortable situation is not happening. If the contractual requirements are being violated, this problem must be addressed head on in a thoughtful and proactive way. By addressing these business issues now, disputes will be minimized. Key relationships will be strengthened rather than destroyed, and will ideally be able to be renewed once businesses are fully operational.

If you need any advice concerning your commercial contracts, please let us know. We’d be happy to help.