Nonperformance, Breach of Contract and Covid-19

September 17, 2020by Brandon Banks

According to Yelp’s September Economic Impact report nearly 164,000 business have closed across the country since the start of the Covid-19 pandemic. That’s a 23% spike since mid July. Yelp estimates that 60% of those businesses, about 98,000, will not reopen.

The report goes on to say that Florida had just over 10,000 business close due the unpredictable economic climate caused by the pandemic. Of those 10,000 businesses only 3,100 are expected to reopen.

It is expected that the pandemic, and the government regulations intended to curb its spread, will continue to disrupt the U.S. and Florida economies.

In this environment, many businesses are finding it more difficult and expensive to fulfill their contractual obligations. As the pandemic continues, and for some time thereafter, businesses will likely continue to find it hard to perform their contracts; increasing both nonperformance disputes and breach of contract lawsuits.

Some business owners will be able to negotiate contract modifications intended to make accommodations for the current economic environment but others may not. They may find themselves needing to go to court to either compel performance, seek redress due to a breach, or defend nonperformance.

Whatever the case may be, business owners should know the legal issues regarding nonperformance and the likelihood of success if the case were to go to court.

Our knowledgeable and experienced lawyers can review your situation and outline the options available to you. To get a free consultation give us a call at (407) 259-2426 or Schedule a Consultation

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Contract Enforceability
And The Covid-19 Pandemic

The basis of a contract is that it is a legally enforceable promise. Most contracts are drafted, unless you’ve purchased an off the shelf generic agreement instead of one specifically prepared by a contract lawyer for your specific situation, with  clauses to mitigate foreseeable problems that could hinder the successful performance of its terms.  However, not all situations are foreseeable. Unforeseeable situations can, under certain circumstances, call into question the enforceability of a contract.

Most people agree that the ability to enforce a contract is the foundation for a strong prosperous business environment. The sanctity of contracts exists in common law, ecclesiastical law, and civil laws around the world. In simple terms, it is akin to “A promise made, A promise kept.”

Court case after court case confirms the enforceability of a contract when it is freely offered, freely accepted, with conditions mutually acceptable to both parties, and each party is competent and has the capacity to enter into the agreement.

Over the years, attorneys and court decisions have standardized contract language and clauses to clarify meanings to minimize confusion. The combination reinforced the validity of contracts so that nonperformance is now more challenging to justify than in the past.

Nevertheless, the enforceability of a contract does come into question when there is an unforeseen situation, one that could not have been reasonably foreseen or planned for; where a circumstance, or set of circumstances, has changed in such a way that the terms of the contract are no longer accomplishable.

Like a pandemic.

Defenses For
Contract Nonperformance

The enforceability of a contract may be legally challenged in several ways, some with a greater possibility of success than others.

Force Majeure Clauses Regarding Pandemics

Force majeure is a legal term originating in the French Napoleonic Code. The parties to a contract generally agree that unforeseen, future circumstances outside their control might prohibit or restrict either or both parties from fulfilling a contract’s terms. This possibility is usually included in a force majeure clause that identifies circumstances – general or specific – that would temporarily suspend the parties’ obligations.

Examples of conditions included in force majeure clauses are sometimes called Acts of God, i.e., natural disasters such as floods, hurricanes, and earthquakes and human-caused events such as wars, riots, or government-ordered shutdowns and financial turmoil that may make maintaining existing operations exceedingly difficult.

A force majeure event is an act that is unforeseen and beyond the reasonable control of the parties to a contract. Because of the force majeure event, the parties might be excused from some (but perhaps not all) of the agreement’s obligations.

The outcome of a dispute over force majeure often depends on the specificity of the defined events covered under the clause, i.e., the language in the contract. A force majeure clause often identifies specific conditions that will suspend a performance obligation.

The World Health Organization officially declared Covid-19 a pandemic on March 11, 2020. Those businesses whose contracts contain “pandemic” in a force majeure clause must be able to prove that

  1. The risk of nonperformance was unforeseeable, and its impact could not be mitigated. Contractual obligations assumed after December 2019 (when China reported the first cases) might be problematic for those seeking relief under force majeure.
  2. Performance is impossible under existing conditions. The existence of stay-at-home regulations by a legal jurisdiction would eliminate the revenues of a restaurant whose primary service was in-house dining.

Businesses whose contracts lack force majeure clauses must turn to other legal doctrines to justify nonperformance.

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Doctrine of Impossibility

Every state recognizes some form of the law of impossibility. This doctrine typically applies to those cases where it is impossible to comply with the terms of the contract through no fault of the parties. The doctrine of impossibility is the basis for force majeure clauses but is also available to the parties of contracts absent of a force majeure clause. One of the earliest cases to recognize the doctrine was a New York State case in 1891. The doctrine of impossibility as a defense to non-performance is fact-specific and depends on the contract’s specific language.

Courts have generally held that the occurrence of the event creating the impossible conditions must be (1) unforeseen, (2) the non-occurrence was a basic assumption of the contract parties, and (3) the event made performance impossible. In various states, courts include impracticability in a definition of impossibility, while others rely on a strict definition of the term that is more specific.

Doctrine of Frustration of Purpose

Frustration of purpose is present when performance is not impossible, but a basic assumption of the parties’ agreement is wrong and causes a significantly different result than the parties anticipated at the signing of the lease. For example, a restaurant owner and a landlord sign a lease expecting that the restaurant will generate enough revenues to fulfill the obligation. As a result of Covid-19, government authorities advised potential customers to stay in place. The action virtually eliminated dine-in customers, the restaurant’s primary source of customers. While the restaurant owner could theoretically offer and serve meals before, customers cannot travel to the business to buy them.

In other words, even when contractual performance remains possible, the effort would produce a dramatically different result from what the lessor and lessee anticipated when agreeing to the contract.

Doctrine of Impracticability of Performance

This condition exists when a contract’s performance is possible but excessively difficult or expensive due to unexpected situations. Unless costs to comply rise to the level that business continuation is questionable, courts rarely accept a mere increase in expense to warrant relief.

The doctrines of impossibility, frustration of purpose, and impracticability exist to protect parties to a contract from unforeseen circumstances that drastically changes the outcome for one or both parties. They differ primarily in definition and degree, although each is grounds for setting aside or modifying a contract by court action.

Final Thoughts

The impact of Covid-19 on businesses is apparent, but whether it or the subsequent regulations limiting movement are sufficient to abrogate a contract remains uncertain. The decision often hinges on a variety of points of law juxtaposed with the terms of the disputed contract. Furthermore, a decision in favor of the business owner may only offer temporary relief, by deferring performance, rather than amending or ending a contract.

If previous efforts to get relief from a contract have been unsuccessful, engaging an attorney to represent your interests may be worthwhile.

While courts exist to settle business disputes that the parties cannot resolve, going to court is a high cost move with a relatively uncertain outcome. We only recommend going to court as a last resort.

Remember that most businesses in your same industry are likely affected, so finding another client to replace you may be more challenging than your vendor/lessor/franchisor realizes. Help them see your problems as their problems so that, working together, you might come to an agreement that benefits all parties.

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