Can Contracts be Broken as a Result of COVID-19?

With most of Latin America (ex-Mexico) on lockdown, we have been getting a lot of phone calls from south of the border. (We know it is a tech entrepreneur when they call us by WhatsApp.) The most common question is whether entrepreneurs will be penalized if they are unable to perform their contracts as a result of COVID-19. Other entrepreneurs have asked how they can prevent their customers from breaking contractual obligations. Below are a few considerations:

Force Majeure

Many contracts contain “force majeure” clauses which state that a party will be excused from performance if it is prevented or delayed in performance by force majeure. “Force majeure” is generally defined as a force outside the control of the excused party, which may include acts of God, warfare, terrorism, strikes, and natural disasters. Since the SARS and MERS epidemics, companies have begun to include pandemics in contractual lists of force majeure events. 

Even if not specifically mentioned, a pandemic such as COVID-19 may be considered a “force majeure” event, to the extent it makes performance of a contract impossible. Consider a contract between a host of a conference event and a venue or a sponsor. In most of the United States, large gatherings have been prohibited for a period of time. These prohibitions make it impossible for conference events to take place, which could excuse performance under a conference event contract.

Force majeure may not be so easily applicable in cases where the contract merely becomes more difficult to perform in light of the economic volatility surrounding the COVID-19 epidemic, or where the event directly affecting performance was reasonably foreseeable. For example, recent currency and price fluctuations, as dramatic as they may be, would usually not be considered “force majeure”.

A contract may require that parties use “reasonable endeavors” to perform in light of a force majeure event. In the example of the conference event, can the event be rescheduled to a later date? Can the event be performed through a webcast? Whether the parties are expected to use reasonable endeavors to perform depends on the facts of the situation and the language of the force majeure clause.

Many contracts include a requirement that a party give notice to the other party in order to be excused under a force majeure clause. The contract may specifically state the manner in which notice should be given and the timing. It is important to review any notice provisions as soon as possible in order to not miss any deadlines provided in the contract.

Impossibility

Even without a force majeure clause, the law of most states provides that a party can be excused from performing a contract if unforeseen circumstances render performance impossible. The circumstances making performance impossible must have been unforeseen at the time the contract was made. Impossibility might not excuse performance, for example, of a contract made in mid-March 2020, after it had become reasonably foreseeable that the COVID-19 epidemic would cause business closures around the world. However, in the example of a conference event scheduled far in advance, even without a force majeure clause, the doctrine of impossibility could very well make the contract unenforceable.

Conclusion

COVID-19 has created an environment of uncertainty concerning the enforcement of contracts. The pandemic and the events surrounding it will render many contracts invalid. PAG Law is here to help you understand how current events may affect your business agreements.


Lizbeth Flores is a Partner at PAG.law and can be reached at [email protected]

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