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Dealing with nonperformance of contracts during pandemic

Country Counsel: Liability depends on the language in a contract.

We have all had our lives interrupted by the COVID-19 epidemic. Our personal lives have been affected as we have all traveled less, stayed home more and maintained some aspect of social distancing. Our businesses have been distressed as well, some a little and some a lot.

One legal issue the COVID-19 situation has created is the nonperformance of contracts. That is, what if you have a contract to provide or receive a service, or to sell or buy a product, and pandemic prevents you from performing your obligations? Are you still liable? As usual, the answer is, “It depends.”

 

Force majeure

Some contracts include a concept called a force majeure clause. Force majeure is a common clause in contracts that essentially frees both parties from liability or obligation due to an extraordinary event or circumstance beyond the control of the parties. A typical clause might read as follows: “In the event either party is unable to perform its obligations under the terms of this agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes.”

This provision is often added to a contract without much thought because it is almost never used. However, these unusual times have brought the force majeure clause to relevance.

Force majeure clauses tend to be interpreted narrowly by courts. If the specific event is not listed in the clause, a court is likely to hold the parties to the contract. The above example force majeure clause does not specifically include pandemics, so a court may not excuse a party’s obligation for performing on the contract. “Other causes reasonably beyond its control” may not be specific enough to be of much help.

Consider the following example. Jill owns a feedlot. Jill has a contract to sell her cattle to a meat processor. The meat processor cancels the contract, stating it shut down due to COVID-19 infections with many employees. If their contract has a force majeure clause similar to the example above, Jill may be able to enforce her contract because the contract does not specifically identify pandemics (she would be owed any lost profits). If the force majeure clause includes pandemics, the processor has a much better argument that the contract cannot be performed. As with most contract issues, it comes down to the specific language.

Impossibility, frustration of purpose

Even if a contract does not include a force majeure clause, there are other similar arguments. The law includes concepts called “impossibility” or “frustration of purpose.” Generally, these concepts are about conditions that occur that could not reasonably have been anticipated, and the condition prevents one or both parties from performing obligations. In the example above, the processor would argue this pandemic could not have reasonably been anticipated and thus makes it impossible for the processor to purchase Jill’s cattle. Impossibility and frustration of purpose is not as strong of an argument as force majeure, but it is worth making.

A careful review of force majeure, frustration of purpose and impossibility clauses in contracts is now a necessity. Be sure to carefully read the causes that will trigger a cancelation of the contract. If you wish to be excused from the contract for unexpected issues related to COVID-19, be sure there is a reference to a pandemic, epidemic, virus or something similar. On the other hand, if you want the parties to be bound to the contract regardless of issues related to COVID-19, do not include pandemic, epidemic or virus.

Try to work together first

All this said, these are unusual times. The parties should always try and work together under the circumstances to be fair to each other. Before taking action based on force majeure, impossibility or frustration of purpose, be sure to talk to an attorney, as each situation and each contract is unique.

Moore is an attorney with Wright & Moore Law Co. LPA. Contact him at 740-990-0751 or rmoore@ohiofarmlaw.com.

 

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