Don't Panic: What to do when Coronavirus Prevents you from Meeting your Contract Obligations

March 15, 2020

      Right now a lot of people are wondering (and/or panicking) about contract performance given the current COVID-19 pandemic and resulting business and government closures. Maybe you’re dealing with sick employees, maybe you’ve decided to close your business temporarily to help stop the spread, or maybe your suppliers aren’t able to deliver on time, which in turns means that you can’t meet your contractual obligations.

        Whatever your particular situation, COVID-19 has probably affected you in some way and you may be wondering if you can invoke that force majeure clause in your contracts or if you’re looking at paying heavy damages. Like most legal questions, the answer to this one is “it depends.” It depends on the language of your particular contract, as well as your particular situation and what exactly is preventing you from fulfilling your contractual obligations.

        A lot of contracts have a “force majeure” provision. This is basically legalese for “events beyond the parties' control” or “extraordinary circumstances” (your contract may also say something like that). There is really no such thing as a standard force majeure clause and, while there are a number of common terms and phrases used in these clauses, your particular contract will dictate what happens under given circumstances.

Common terms

        One common term is an “act of God.” This usually refers to a natural disaster of some sort. The clause may include a laundry list of natural disasters and other unforeseeable circumstances that would be included. A pandemic may qualify depending on circumstances. If you happen to have a contract that specifies a pandemic is a reason for nonperformance, you’re golden, but those are pretty rare (although I suspect they won’t be for contracts entered into following COVID-19).

        Some force majeure clauses will specify that a party must be prevented from performing its obligations because of an “act of government” or “by the state.” In one case, where a lease specified “any action by the state which interferes with the lessees’ rights,” the court found that the clause was properly invoked where the lessee was not able to obtain permits for geothermal wells (the purpose of the lease) because the Oil and Gas Conservation Commission was not issuing them.  Gillespie v. Simpson, 588 P.2d 890, (Colo. App. 1978).

Impossibility of Performance

    Colorado also follows the common law doctrine of “Impossibility of Performance,” so even if you don’t have a force majeure clause in your contract, you may still be excused from performance if your situation meets this standard. To establish this defense, you have to “demonstrate changed circumstances which have made the ‘promise vitally different from what reasonably should have been within the contemplation of both parties when they entered into the contract.’” Barrack v. City of Lafayette, 829 P.2d 424, 428, (Colo. App. 1991) (quoting Littleton v. Employers Fire Insurance Co., 453 P.2d 810 (Colo. 1969). If you are basing your defense on government action, government action must make the performance of your contractual obligations illegal. Id.

      For example, if the government imposes a shelter in place order or mandatory quarantine and you require employees to do certain work that can’t be done from home in order to fulfill your contractual obligations, you may be successful in arguing impossibility of performance.

          The law is less clear on whether you can invoke the doctrine if it is just recommended that your employees stay home to prevent the spread of coronavirus, when they are not sick or under any sort of government mandate. If these circumstances merely mean you can’t deliver on the same timeline or you can, but it’s going to cost you, that may not be enough to qualify under this doctrine.

          Other defenses may also apply, but – at the risk of sounding like a broken record – this will depend on your particular circumstances and the language of your contract.

What to do

           So what should you do if you’re facing a situation where you think you may not be able to perform on a contract?

Step one: Try talking to the other party. This is particularly important if you are hoping to continue an ongoing business relationship with them. This is an unprecedented situation and everyone is trying to figure it out as we go along. Hopefully, the other party is reasonable, understands that we are all dealing with some very unusual circumstances and will be willing to renegotiate your contract terms.

Step two: If you’re not able to come to a resolution with the other party or they are simply not willing to talk, that’s when you want to bring a lawyer into it. Have your lawyer review your contract terms and your particular situation. They can then advise you on whether you can invoke a force majeure clause or otherwise have a strong argument in favor of nonperformance, or, alternatively, what kind of damages you are potentially looking at paying if you really can’t perform on the contract. Your attorney can then try negotiating with the other side and may get farther than you did. Sometimes people are more willing to listen to an attorney than someone without a law degree.

Step three: Prepare for litigation. Worst case scenario, you’re looking at a potential lawsuit. If you haven’t already talked to a lawyer at this point, you definitely need to. Make sure you have all of your ducks in a row and appropriate documentation to support your assertion that you can’t perform on the contract.

This situation is new for everyone, but you don’t have to navigate it blindly. The right legal advice can help you stay on track and minimize the harm to your business as much as possible.

This document is intended to provide you with general information regarding the impact of the coronavirus pandemic on obligations under many types of contracts. The contents of this document are not intended to provide specific legal advice. If you need specific advice, please contact me to discuss your situation.