Over the next few months, businesses across America will be facing the same situation: a contract was breached or a deal fell apart because of COVID-19. If that’s you, you’ll want to at least consider the following issues.
Does the contract excuse performance?
Many (but not all) contracts excuse performance in the event that an “act of God” such as a hurricane or flood (or, here, a global pandemic) make performance impossible or impracticable. Look at your contracts, and if you see such a provision (they are generally called “force majeure” clauses), a party’s performance may be excused.
But the existence of such a clause will probably not give a party free rein to do whatever it pleases; a failure to perform under the contract likely must actually be caused by COVID-19 (or, perhaps more likely, the subsequent governmental responses). And the contract might require you to provide notice that you will be unable to perform due to COVID-19; if you don’t provide proper notice, you may still be held to the terms of the contract.
Remember that not all contracts contain a force majeure clause. The Texas Real Estate Commission’s standard form contract for sales of individual homes (for one widely used example) does not contain such a provision. If the contract does not have a force majeure clause, you’ll need to look elsewhere.
Can I argue that it is impossible for me to perform?
Under Texas law, a party may be excused from its obligations under a contract if performance is made impossible by an event that occurs after the execution of that contract. For most contracts, the Second Restatement of Contracts provides that:
Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.
Similarly, the Uniform Commercial Code (which applies to contracts for the purchase and sale of goods) provides that:
Delay in delivery or non-delivery in whole or part by a seller ... is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.
What’s the difference between relying on a force majeure clause and arguing that it was impossible to perform? While the arguments are similar, there are differences. First, to argue impossibility of performance, you will need to show objective impossibility: that the contract could not be performed by anyone, and not just you. Under a force majeure clause, you might be able to argue that COVID-19 made performance impracticable for your business, even if other businesses would have been able to perform. Second, to argue impossibility, you will probably need to show that you exercised reasonable efforts to overcome the impossibility, but were still unable to perform. Under a force majeure clause, you may not be required to pursue the same efforts (unless the contract requires otherwise).
Remember, timing is important
Again, the fact that COVID-19 happened will not, across the board, relieve parties of their contractual obligations. One major reason for that is timing. If you (or your contracted party) were already in breach of a contract before COVID-19 restricted business, you probably cannot argue that COVID-19 was the cause of your breach (after all, you were already in breach). Similarly, if you entered into a contract after COVID-19 had restricted business, you probably cannot argue that the COVID-19 restrictions were unforeseeable at the time of contracting: all of the contractual defenses above require an inability to foresee COVID-19 to apply.
Of course, it’s important to review your contracts to know what your rights are. And, of course, if you need help enforcing your rights, we’re here to help.
