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Interpreting Contract Provisions During The COVID-19 Outbreak
By The impact of the COVID-19 outbreak continues to escalate each day. Issues continue to arise both due to the outbreak itself and as a result of our response to it. We will continue to monitor the legal implications of the pandemic and help address legal and practical issues that may arise during this challenging time.
The COVID-19 pandemic presents multiple different types of potential contractual issues. Of particular importance is a force majeure clause that may be present in a contract. A force majeure clause is intended to address a potential “force of nature” disruption that may excuse performance of a contract. Even if a contract does not have a force majeure clause, it may still be possible to excuse performance under other legal theories, including frustration of purpose.
Force Majeure
In broad terms, a force majeure clause is a provision of a contract in which the parties to the contract agree to excuse performance if one or both of the parties can no longer perform due to unforeseen external events beyond their control. Often, a force majeure clause is standard boilerplate language – included in a contract with little thought or negotiation. If you are contemplating entering into a new contract during this uncertain time, you should consider including a force majeure provision. In addition, you should consult with counsel to ensure that you are protected from situations outside your control.
The COVID-19 outbreak has affected and will continue to affect businesses around the world. Governor Evers, consistent with many other states, issued a stay at home order that may severely impair the ability to perform under many agreements. Businesses and individuals should take inventory of contracts that could be affected by COVID-19, review the terms of each contract, including any force majeure clause, and determine whether the parties are able to continue performance under the contract.
If a party invokes a force majeure clause to excuse an obligation to perform, the success of such excuse depends on a multitude of factors. The precise wording of the provision, the alleged outside event, and governing law on contract interpretation all impact a party’s likelihood of success in invoking a force majeure clause. In addition, these same factors impact whether the affected party can delay performance or be completely released from performance. You should consult an attorney to determine your unique performance obligations.
Frustration of Purpose
The frustration of purpose doctrine is a defense to the enforcement of a contract. It applies when the party’s principal purpose in making the contract is frustrated without that party’s fault by the occurrence of an event, non-occurrence of which was an assumption on which the contract was made. If these elements are met, then a party’s obligations under the contract are excused. It is important to note that reductions in profits or increases in costs alone are insufficient to establish a frustration of purpose. As with a force majeure clause, whether frustration of purpose applies to a particular situation is dependent on multiple factors, including the precise contract language as well as external evidence demonstrating the contract purpose. Due to variations in contract language, it is advisable to consult a lawyer if you believe this doctrine applies to an existing contract.
How to Manage Existing Contracts
Businesses and individuals will want to take a complete inventory of any contracts that may be affected by the COVID-19 pandemic, considering the present travel restrictions, group gathering restrictions, and essential business restrictions. Be sure to review each contract’s terms, including any force majeure clause, and determine whether the parties will have any issues with continuing performance under the contract. Businesses should also begin taking any steps necessary to mitigate potential losses if there is a possibility that the contract cannot be performed. Conversely, businesses that need to enforce the terms of a contract should be aware of any failure by the nonperforming party to follow any provisions of the contract. Indeed, the COVID-19 pandemic should not be used as a scapegoat for a contract that can still be performed.
Gimbel, Reilly, Guerin & Brown, LLP can provide legal help to clients that anticipate being or are currently involved in a contract dispute related to COVID-19 or who are currently involved in these types of disputes. A proactive approach now will reduce future contract litigation later. If you need advice about how to address contract issues, contact the Milwaukee business law attorneys at Gimbel, Reilly, Guerin & Brown, LLP at 414-271-1440 to schedule a consultation today.
Sources:
Goldstein v. Lindner, 2002 WI App 122, 254 Wis. 2d 673, 648 N.W.2d 892 (2002).
Convenience Store Leasing & Mgmt. v. Annapurna Mktg., 2019 WI App 40, 388 Wis. 2d 353, 933 N.W.2d 110 (2019).
https://www.perkinscoie.com/en/news-insights/practical-guidance-on-interpreting-force-majeure-provisions-in-the-wake-of-the-covid-19-outbreak.html
