How will the COVID-19 outbreak affect your contractual obligations?

How will the COVID-19 outbreak affect your contractual obligations?

Most contracts contain a boilerplate force majeure or act of god clause that will relieve parties of their obligations if they are rendered unable to perform under the contract due to some unforeseeable act of god*. Other contract doctrines that may apply in the wake of the Coronavirus include impracticability of performance or frustration of purpose.

Force Majeure:

Force majeure translates literally from French as superior force and it is used to protect parties to a contract from risks outside of the normal business risks associated with contracting. While most contracts contain boilerplate force majeure clauses, those that do not include the clause cannot claim force majeure.

Additionally, there is no standardized force majeure clause. This means that whether COVID-19 will be considered a force majeure event could depend on the particular language included in your contract. Some force majeure clauses specifically list a ?pandemic? in an exclusive list of force majeure events. However, some clauses will include catch-all language stating that the clause covers extraordinary events beyond the reasonable control of the parties. Depending on the catch-all language the Coronavirus pandemic may or may not be covered.

It is important to note that the party alleging the force majeure clause applicability must show that they attempted to mitigate the effect of the event on performance under the contract. Mitigation is normally shown through reasonable alternatives to original performance.

Impracticability of performance or frustration of purpose:

When there is no force majeure clause, impracticability or frustration of purpose may apply. With impracticability or frustration, a party must show that the original purpose of the contract has been frustrated, and it would be unjust for them to be bound due to the existing circumstances. Like in a force majeure action, when alleging impracticability or frustration, you must show that the event frustrating the contract was unforeseeable and that neither party is at fault for the event.

Under the restatement second of Contracts, impracticability of performance or frustration of purpose only temporarily suspends the duty to perform while the impracticability or frustration exists but does not discharge his duty or prevent it from arising unless this performance after the cessation of the impracticability or frustration would be materially more burdensome than had there been no impracticability or frustration**. This means that once the Coronavirus pandemic is resolved, your obligations under the contract could continue.
Some other considerations to weight include:

Efficient Breach:

It may be more economical to breach the contract then to continue performance after concerns over COVID-19 have cleared. If the cost of performing outweighs the cost of breaching the contract, then an efficient breach may be the best option. In the case of efficient breach, a party would voluntarily breach the contract and pay the damages associated with that breach because there would be greater economic loss by performing under the contract.

As a Consumer is Return of Goods for a Refund an Option?

Under the Virginia Consumer Protection Act, return and exchange policies must be disclosed by means of a sign attached to the goods or placed in a conspicuous public area of the premises of the supplier so as to be readily noticeable and readable by the person obtaining the goods from the supplier***. Thus, if the seller does not permit a refund or exchange, there should be a notice of such. If there is not a notice of the return policy in your contract or in a conspicuous public area, then you may have an argument that you are entitled to a return of goods purchased that you may no longer need due to the Coronavirus.

It is important to know how these contractual doctrines will affect your obligations. Each contract is different and should be reviewed by a legal professional for determination of whether there is an excuse for non-performance based on the current pandemic.

Insurance policy coverage

Look at your insurance coverage. Some policy have coverage for what is occurring at this moment, this may allow individuals or businesses to continue their obligations under contracts should their insurance policy have coverage for this shutdown occurrence.

Bankruptcy chapter 11

Under new federal guidelines small businesses have new avenues under chapter 11 to re-organize their debts in a less costly fashion. This may be a good option at this time to look at this option.

Please feel free to reach out to us at Lugar Law to discuss any questions you may have during this extraordinary time.

*Va. Code Ann. ? 59.1-21.18:2 (West)
**Ginicorp v. Capgemini Government Solutions, LLC., 2007 WL 420132 (Va. Cir. Ct. 2007)
***Virginia Consumer Protection Act ? 59.1-200(16)(a).