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COVID-19, Contracts and Force Majeure

Posted by Sean Cork | Apr 10, 2020 | 0 Comments

As social distancing and non-essential business closures continue, businesses face increasing financial pressures.  We have already explored some bankruptcy and non-bankruptcy options that businesses might explore.  Today we will discuss the extent to which contract law may be able to help those businesses that are unable to meet their contractual obligations with other parties.

  1. Force Majeure. Contracts used in the business world often have a force majeure clause.  These types of contractual provisions generally excuse one or both parties from performing under the contract when certain circumstances arise that are beyond either party's control that make performance impractical or impossible.  Force Majeure events are typically referred to as “Acts of God” such as war, natural disasters, or a change in law that impacts the contract itself, although California law does not limit the application of such clauses to Acts of God alone.  Pandemics such as COVID-19 are generally recognized as “Acts of God” that trigger a force majeure clause.  If your business operates under one or more contracts, it is important to review them as soon as possible to see if they contain force majeure clauses, and, if so, whether the provision contains any specific notice or other procedures to trigger them (remember, as a general rule the terms of the contract control how it will be enforced). 
  2. Impossibility of Impracticability of Performance. If your business contract(s) does not contain a force majeure clause, the doctrine of impossibility or impracticability of performance may be available.  Briefly, this concept recognizes that future events may completely frustrate performance of a contract (not unlike a force majeure clause), and thus may excuse a party from performing under a contract if that performance has become impossible or impractical due to the occurrence or non-occurrence of some event that formed an underlying assumption for the contract itself.  For example, it could be argued that a contract to deliver goods is premised on the fact that businesses will remain open to the public, and that the State's order to close down non-essential businesses has made the performance of such a contract impossible.

As always, the legal issues surrounding contract law are often complex.  If you own a business and are concerned that you will have difficulty meeting your contractual obligations, contact a qualified attorney as soon as possible.

About the Author

Sean Cork

Sean Cork, Attorney Recognized as one of the Best Lawyers in America® on numerous occasions since 2013. Sean Comes to the table with Over 18 years experience advising Fortune 500 companies and hedge funds in bankruptcy, restructuring, and insolvency, including leading complex federal litigatio...

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