Business and Coronavirus

woman business owner looking sullen at her laptop
If you are a business owner, you will not just experience changes in customer traffic and income. An avalanche of issues could present themselves because of the COVID-19 pandamic. Everything about your business is or could be affected.
 
A sample of issues:

1. Lost revenue
2. Workers not coming to work
3. Supply chain disruption for inventory
4. Supply chain disruption for parts
5. Overwhelmed with service and warranty requests: if people are home more, they will be on the phone more
6. General grouchiness from those you deal with. Peoples’ lives are disrupted. Simple things like toilet paper are suddenly in short supply. And, they are worried. Fear often manifests itself as anger
7. Difficulty paying bills
8. Difficulty getting paid
 
What you need to do is a top-down review of your business. Figure out where you are or will be affected. The proactive businessperson is much more likely to survive a crisis. Bear in mind you are not the only person that is worried. As reported in a March 2, 2020 story in smallbiztrends.com:
 
“According to a new survey from Veem, 27% of businesses expect the coronavirus to have a moderate to high impact on their revenue. Another 30% expect the virus to have a moderate to high impact on their supply chain. Even more revealing, over half or 52% say they are taking measures to prepare for an economic slowdown. They are increasing pricing, changing suppliers, decreasing operational costs or protecting cash flow. So even at this early stage business owners are taking precautionary measures to protect their business. This is because global events affect small and medium-size businesses disproportionately, this according to Veem CEO, Marwan Forzley.”
 
Now on to some specific business contract legal issues. There are two major business contract issues for you to consider regarding nonperformance in the context of the coronavirus pandemic. One is what is called force majeure. The other is called frustration of purpose. These are potential escape hatches for those bound by a contract.

Force Majeure Clauses

Contracts often include a force majeure clause. If you enter into contracts, read what yours say.  These clauses allocate the risk of performance if performance is delayed indefinitely or stopped completely due to circumstances outside of a party’s control which make performance impossible, inadvisable, commercially impractical, or illegal.
 
They address types of events that would cause  contract promises to be suspended or that would excuse performance. The purpose of the provision is to relieve a party impacted by the force majeure by extending, temporarily suspending, or terminating the contract due to unexpected and unavoidable events such as “acts of God,” including hurricanes, tornadoes, floods, earthquakes, landslides, and wildfires, and certain man-made events like riots, wars, terrorism, explosions, labor strikes, and scarcity of energy supplies. And now that we think about it, pandemics like coronavirus. To be classified as a force majeure event, the event must be beyond the control of the contracting parties. It usually cannot be anticipated, foreseeable, or expected in its specific current form that is affecting you. It usually must be unavoidable.
 
You are also at risk if you are negotiating a contract under these current circumstances, because this Coronavirus environment is upon us. Therefore, we should anticipate how it could affect our contract performance. If you promise to do something knowing there are significant risks that you will not be able to honor your promises, you may have a hard time later saying you did not anticipate coronavirus affecting your ability to perform. So, what can you do? Get help drafting a contract that says the parties know about the coronavirus and address how future increasing impacts may still cause performance to become delayed or impossible in the future.
 
Do not just focus on the force majeure clause. All contract terms should always be negotiated between the parties by taking into account what could go wrong. This is often the hardest thing for a person to do. On the front end of a deal, people are excited and sure nothing will go wrong. It does. Often. So, try to figure out what could go wrong and work with your lawyer to find wording to manage that risk.
Like contract language generally, when defining the scope and effect of a force majeure clause consider the possible things to address:
  • What events are considered force majeure?
  • Who is responsible for suspending performance?
  • Who is allowed to invoke the clause?
  • Which contractual obligations are covered by the clause?
  • How should the parties determine whether the event creates an inability to perform?
  • What happens if the force majeure event continues for more than a specified period of time?
For companies with force majeure clauses in your contracts, review what yours says to make sure they provide clear, comprehensive, and adequate protections for the company and consider or whether they might let the other side off the hook. Consider whether terms such as “widespread epidemic,” “pandemic,” “public health emergency,” or “virus or bacteria outbreaks which significantly and materially interrupt the parties labor or supply chain” should be added to their force majeure clauses in light of the threat posed by the current coronavirus outbreak, as often courts will interpret the clause based on what is specifically listed in the contract.  Contractors should also review the terms of their existing force majeure clauses in preparation for potentially needing to invoke them for coronavirus-related issues, as many times force majeure clauses contain requirements that must be met to invoke and rely on the clause such as providing written notice within a certain time frame and mitigating some of the damages caused by non-performance.

Frustration of Purpose

We have seen it defined this way: the inability to complete a contract because an item has fundamentally changed, e.g. a bottle of wine that was to have been purchased was discovered to be incorrectly labeled or a cow to be purchased had died during negotiation.
 
More specifically, consider this definition. Frustration means an event that is not foreseen or controllable which prevents and excuses a party to a contract from being able performing the party’s obligations or duties under the contract. For example, a lease can be terminated by a landlord if the rented premises burn down prior to entry and occupation by new tenants.
Finally, consider this definition. When an unforeseen event makes the purpose of the contract unable to be completed or fulfilled, such as the destruction of items, a law which renders the actions contemplated under the agreement illegal. Under certain circumstances it will automatically terminate a contract, such as where (i) the contract objectives cannot be achieved, or performance has been rendered impossible or (ii) the actions are suddenly deemed illegal.
 
This is what is referred to as a common law defined area as opposed to a statutory area. We can often go back many years to understand common law principles. They evolve over time, but what seems like ‘old’ law often still applies. We like this explanation from a case decided in 1965 called Crown Ice Mach. Leasing Co. v. Sam Senter Farms, Inc. which is old, but still helpful. ‘When an unforeseen event makes the purpose of the contract unable to be completed or fulfilled, such as the destruction of items or a law which renders the actions contemplated under the agreement illegal. Under certain circumstances it will automatically terminate a contract, such as where (i) the contract objectives cannot be achieved, or performance has been rendered impossible and (ii) the actions are suddenly deemed illegal.’ Sound familiar? Legal dictionary definitions are generally drawn from what courts say things mean.
 
As a good business practice apart from who will win if a dispute goes to court, the best advice is to talk with the person or company you made a deal with. As crazy as this sounds, we wish people would be reasonable and work out their differences. We have plenty of work and wish people would get along better when something goes wrong. People are generally understanding and cooperative. If you talk about problems you are having, they might surprise you and work with you to get through the rough patch. They may be struggling in their own way. If you are counting on someone to perform, talk to them to understand why they are struggling and work together to try to get through this tough time together. Silence causes the other side to get suspicious or angry. Being open and honest and understanding gets you to the golden rule: do unto others as you would have them do unto you.
 
 
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And now the careful (paranoid?) lawyer's disclaimer: 
The matters discussed here are general in nature and are not to be relied upon as legal advice. Every specific legal matter requires specific legal attention. The law is constantly changing and matters discussed today may not be the same tomorrow. Legal matters are also subject to different interpretations by attorneys, judges, jurors and scholars.

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