During this Corona virus pandemic, we’ve received questions from people about how the pandemic affects their contractual obligations. There’s been a considerable amount of disruption worldwide that can interfere with people’s ability to perform their contracts. Typical problems raised by the Corona virus include business shutdowns, safe distance, social distancing guidelines that prevent certain kinds of business activity. They also include factory shutdowns, the ability to get parts, to perform services and a host of other issues that have come up related to this pandemic. And the first thing I want you to know is that we’re here for you. Your business obligations are important, not only to you, but to us. We want to provide the most help that we can.
Here is a review of some legal contract defenses that can be considered with a business interruption scenario that we’re in.
The first contract issue is called “Impossibility”. As the name implies, the law recognizes that there are certain situations where parties enter a contract and for reasons outside one or the other or both parties control, you can’t perform. It’s just impossible due to the current situation. And so, that’s one thing that you’ll want to consider as a potential legal defense. An example of an impossibility scenario might be that you have a theater production company and you’ve agreed to put on a play at such-and-such theater, but the theater gets closed down because of the pandemic. And so, it would be impossible for you to go into that theater and perform the play.
The next concept that you should be familiar with is like and possibility, but a little less severe. It’s called “Impracticability”. So it’s, it’s not necessarily impossible, but it would be excessively burdensome for you to perform that obligation. It’d be unduly expensive in a way that you and the other side did not foresee or contemplate when you entered the agreement.
Frustration Of Purpose
The third related concept that that comes up in the law in these types of situations is called “Frustration Of Purpose”. And that’s a situation where you can perform and you can do what you agreed to do, but it wouldn’t make any sense. So perhaps an example of that would be that going back to our theater analogy, you run a cleaning service that you agreed to clean the theater after every show or clean the theater every day or, at some interval. Well, now they’re not running any shows. The theater’s not getting dirty. So it doesn’t really make sense for you to go into the theater and clean it every day. That would be a potential example of a Frustration Of Purpose where it just makes little sense to perform the duties of the contract. Those are all legal doctrines that have been handed down through the ages.
Force Majeure Clauses
In addition, a lot of contracts will have language that contemplates a supervening event or events out of people’s control. We call them “Force Majeure Clauses”. The contract may say if some factor arises such as a strike, riot, or an act of God, then the parties are excused from their performance requirement or they’re excused from delay in their contract performance. So maybe you can perform, but everybody realizes it will take longer. Those Force Majeure Clauses need to be looked at closely to figure out if the pandemic event is one that comes up within the protection of that clause. This clause is one that I would recommend talking to your business lawyer for a close review.
Hopefully, it helps to understand some legal frameworks through which we business lawyers view these contracts and whether they can or should be performed or the delay excused.
If you’d like to have a deeper conversation that goes into the particular contractual obligations you’re concerned about, we’re happy to consult with you and review that with you. You can reach us at (775) 448-6070 and we’ll be happy to start that discussion.