Information on how COVID-19 could affect your contracts and agreements.
Good contracts are like instruction manuals for business relationships. The contract will outline each party’s rights and obligations, and provide a roadmap for how to resolve any disagreement or dispute. Unfortunately, not all contracts are “good contracts,” and even “good contracts” do not (and cannot) anticipate or address every possible risk or outcome. In other words: Each contract is different, and there is no “one-size-fits-all” answer to any legal question about contracts. Accordingly, the information on this site is generic in nature and is not based on your (or any) particular contract or situation, so it may not apply (or may apply differently) to your given circumstances.
Additionally, regardless of what your contract says (or does not say), a good starting point is to have an open discussion with the other party about how the COVID-19 pandemic is affecting each of your business operations (and employees and bottom lines), and discuss ways to find a solution that works for both parties. There is a good chance that the other party is facing similar issues (whether related to your contract or with other contracts), so hopefully there is a way that you can work together to find a solution and maintain a positive working relationship.
Regardless of how you decide to proceed, you should always document any amendment or change to the contract by creating a simple document that references the original contract (including the name and date of the agreement) and identifies the specific amendments or changes that the parties are making. If the other party will not agree to any amendment or change, you should send them an email (or letter) stating your position, your requested amendment or change, and their response. While this may feel somewhat awkward, it is a worthwhile step to take if you expect that the other party may (eventually) seek to pursue you for a “breach” of the contract — it will certainly not protect you from liability, but it will show that you made a good-faith effort to resolve the disagreement or dispute.
Can I terminate my contract due to the COVID-19 pandemic?
It is unlikely that you can simply terminate your contract due to the COVID-19 pandemic (or for any other reason) – most contracts do not allow you to terminate unilaterally (regardless of the situation or circumstances). So the first step is to read your contract to see if it discusses termination. (Some contracts have an entire section dedicated to termination, while others have only a sentence or two – or nothing at all.)
However, it is possible that your contract contains language that allows you to either (a) terminate “for convenience” (or without any cause or reason) or (b) terminate (or suspend) the contract if certain unanticipated or uncontrollable events make performance impracticable or impossible.
If your contract allows you to terminate (without cause), you should still review the termination language for any “notice” or other requirements to properly terminate. Also, the termination might not be effective immediately – for example, any termination might not be effective for 30 days after the notice is given.
Either way, you can always terminate a contract if all parties agree. So, regardless of what your contract says, it might be helpful to have a discussion with the other party about how the COVID-19 pandemic is affecting your (and their) business operations (and why it is preventing you from performing your obligations under the contract), and work together to find solution that works for both parties. It is (very) likely that the COVID-19 pandemic is affecting their business, as well, so there is a good chance the parties can find a solution if both are reasonable and flexible.
Regardless of which way you proceed, you should create a record of your decision in a written document signed by both parties. Even if you (properly) terminate your contract, it is possible that one party will still owe the other party something (i.e. one party delivered goods or services but the other party has not paid yet, or vice versa). So you should be clear about which party (if any) has any remaining obligations, and how/when those obligations will be satisfied.
How do we mutually agree to amend or terminate a contract?
Generally, you can always agree to amend, change, or terminate a contract if both parties agree.
Many discussions about how or whether to amend, change, or terminate a contract take place via email or even via telephone. However, once you decide to amend, change, or terminate the contract, you should make sure to do so in a written document signed by both parties.
Can I suspend or “pause” a contract rather than terminating it?
Yes, you can suspend or “pause” a contract if both parties agree. However, unless there is specific language in the contract that says otherwise (which is unlikely), you cannot “pause” the contract (unilaterally).
If the parties decide to suspend or “pause” a contract, you need to create a record of your agreement in a written document (amendment) signed by both parties.
Another option is for the parties to agree to terminate the contract, with the understanding that you will reconnect when business operations resume and negotiate a new agreement that is (more) appropriate for the then-existing circumstances.
What is a “Force Majeure” provision and does it apply to the COVID-19 pandemic?
Generally, a “force majeure” provision says that it is not a “breach” (or violation) of the contract if one or both of the parties cannot perform due to uncontrollable and unanticipated events or circumstances. These provisions are often included – or, perhaps more accurately, “buried” – in the “miscellaneous” or “general” provisions (i.e. “boilerplate” language) at the end of a contract. But these provisions are rarely invoked, so many (shorter and less formal) contracts omit them entirely.
Typically, a “force majeure” provision will list certain types of events – e.g., “Acts of God”, natural disasters, political/governmental unrest, etc. – as well as a broad (and likely vague) “catchall” at the end. Unfortunately, there is no “standard” language, so it is impossible to know if any given “force majeure” provision will provide any relief or protections as a result of the COVID-19 pandemic.
Moreover, it is unlikely that many “force majeure” provisions include specific “pandemic” (or related) language – although you can rest assured that almost all of them will in the future. However, this is not necessarily a problem, because the “force majeure” event does not need to be the COVID-19 pandemic itself. Depending on the language of your “force majeure” provision, it is possible that the resulting effects and consequences of the COVID-19 pandemic would qualify.
Either way, it is impossible to make this determination without reviewing the specific language in your contract. But if you think it might apply, you should (a) contact the other party to discuss this with them directly (because it is possible that the COVID-19 pandemic is affecting their business, as well, and they might agree to “pause” or terminate the contract either way) and (b) pay attention to any “notice” or other procedural requirements that you must comply with if you invoke the protections under the “force majeure” provision.
Otherwise, if your contract does not include a “force majeure”, it is (still) possible that the COVID-19 pandemic may give you an excuse to “pause” or terminate your contract. (Please see the discussions related to “impracticability” and “impossibility” in this section.)
If my contract does not include a “force majeure” provision, is there any other (legal) justification for terminating a contract?
If your contract does not have a “force majeure” provision – or, even if it does, but it might not apply – there are other legal doctrines that might provide an “excuse” for not performing your obligations under a contract.
Impossibility: You may be excused from performing your obligations under a contract if doing so becomes “impossible” due to an unexpected and extraordinary event or circumstance. However, it is not enough for your performance to be significantly more (or even prohibitively) expensive – it must (actually) be “impossible” for you to perform. As a result, it is extremely difficult (and rare) to (successfully) rely on this defense in practice. (Also, in the sales of goods context – which is governed by the Uniform Commercial Code – this doctrine was superseded by the concept of “impracticability”, discussed below.)
Commercial Impracticability: You may be excused from performing your obligations under a contract if doing so becomes “impracticable” by an event or circumstance if the nonoccurrence if that event or circumstance was a basic assumption of the contract (and you did not assume a greater risk than the law would otherwise provide). Given the unprecedented and incredibly challenging nature of the COVID-19 pandemic, it is possible that it has made your (or the other party’s) performance “impracticable”. However, to successfully rely on this defense, you may also have to prove that you explored and exhausted all other alternatives, and otherwise acted in “good faith” after the occurrence of the event.
Frustration of Purpose: You may be able to “rescind” (or cancel) your contract if your “principle purpose” in entering into the contract becomes “virtually worthless” by an unexpected and extraordinary event. However, as with “impossibility”, it is not enough for your performance to be significantly more (or even prohibitively) expensive – your “principle purpose” must be rendered useless. Although the COVID-19 pandemic is an unprecedented and incredibly challenging situation, it is worth noting that the Oregon Supreme Court has yet to review a case in which the facts justified the defense of “frustration of purpose”.
What if I just signed a contract but neither party has done anything yet?
As always, the first step is to read your contract and see if it says anything about termination and, if so, whether there are any notice or other requirements.
Otherwise, if neither party has expended any (significant) money under the contract, the parties can easily terminate the contract by signing a written document agreeing that the contract is terminated (effective upon signing).
What if I have already provided goods or services (or paid) but the other party has not paid (or provided goods or services)?
This is likely a very common scenario is this COVID-19 pandemic economy, as many businesses have reduced hours and operations (or even closed entirely) and, thus, cannot fulfill their contractual obligations.
If you have an ongoing relationship with the other party (and especially if you would like to maintain that relationship whenever the COVID-19 pandemic ends), you should contact them to discuss how to handle the situation. It is likely that you can work out a solution that does not involve either party resorting to threats of litigation – of course, you may have to agree to wait (awhile) to receive the goods or services (or payment).
If you do reach an agreement, you should create a record of this in a written document (amendment) signed by both parties – and include any specific information that will help avoid confusion if you need to revisit the agreement in the future. For example, you should include the amount owed (or undelivered goods and services), any applicable interest rate, the (new) due date, and what will happen if they (still) cannot perform when the (new) dude date arrives.
Otherwise, regardless of your relationship with the other party, if they are unwilling to (or uninterested in) discuss this with you, then you should review your contract to see what procedure (if any) you need to follow to (formally) notify them of their “default” or “breach” for nonpayment (or nonperformance). You should also send them a written notice saying that you do not intend to waive any of your rights or remedies even if you elect not to exercise them during (or after) the COVID-19 pandemic.