For the foreseeable future (at least the rest of the spring), American life will change. This includes businesses. We all need to work together to get back to a place where our economy can thrive.
While we should be inclined to have grace and mercy during these times, it is wise for the business executive or business owner to have a firm understanding of how a pandemic affects the company’s contractual rights with vendors, suppliers, customers, and other third parties. Here is a step-by-step analysis that a corporate attorney should guide you through:
1. Analyze your written contract. When something completely unexpected hinders performance, a force majeure clause is the first place to look. It is generally located among the “miscellaneous” clauses. Like most miscellaneous clauses, a force majeure clause one is not commonly negotiated or regularly reviewed. Here is an ideal clause, from the perspective of a party seeking to avoid performance: “Party A shall not be liable or responsible to Party B, nor be deemed to have committed a material breach of this Agreement, for any failure or delay in fulfilling or performing any term of this Agreement when and to the extent such failure or delay is caused by or results from acts or circumstances beyond the reasonable control of Party A including, without limitation, acts of God, governmental actions, civil unrest, national emergency, epidemic, flood, fire, earthquake, explosion, war, invasion, terrorist threats or acts, riots, or other revolution, insurrection, lockouts, strikes or other labor disputes (whether or not relating to either party’s workforce).”
2. Research any questionable language. The items underlined above are likely to be useful, if not conclusive, for a party seeking excuse for performance. Absent a precise match (i.e., “epidemic”), an attorney may need to research the applicability of a clause such as “acts of God” to the current situation. Even then, case law might not have an answer for more unique fact patterns. In that instance, it will be up to an attorney to persuade the finder of fact as to whether the parties intended for the language to excuse contractual performance due to a pandemic.
3. Does the “impossibility” defense apply? For more than 100 years, Ohio has recognized the “impossibility” defense for contracts. As recently described by the 8th District Court of Appeals: “Impossibility of performance occurs where after the contract is entered into, an unforeseen event arises rendering impossible the performance of one of the contracting parties.” Leon v. State Farm Fire & Cas. Co., 8th Dist. No. 105306, 2017-Ohio-8168, 98 N.E.3d 1284, ¶ 11. While the “unforeseen” element is likely to be met due to coronavirus, the “impossibility” element might be difficult to prove. A party will not be excused because of unexpectedly difficult (as opposed to impossible) circumstances, even if a government action “makes performance more expensive, more burdensome.” Std. Oil Co. v. City of Englewood, 2nd Dist. Montgomery No. 6160, 1979 WL 208450, *3. For sales of goods, a different standard applies. See R.C. 1302.73 (where performance is “impracticable,” a seller may fairly allocate delivery among all of its buyers, provided notice is timely delivered).
4. Consider the other party’s interests. If you are aware that damages may flow from your non-performance, it may be critical to provide prompt notice, so as to mitigate the damages incurred by the other party. For sales of goods, this notice is a requirement to avoid liability. Such notices should always be in writing; if applicable, follow the notice provisions of the contract.
5. Can we work it out without the lawyers? This should be the first goal, before writing stiff letters and filing court documents. Litigation is expensive, and the expense is magnified in times where revenue is not meeting budgeted expectations. Active commercial litigation can cost $10,000 a month at its most intense points. A party should budget around $2,000 just to get a demand letter written by a lawyer, depending on complexity of the issues. For these reasons, a collaborative approach is ideal. However, it is wise to know your legal rights before you enter discussions, so that you will have confidence as to what a “fair” resolution will look like. Other good pre-disputes considerations: (a) how much money is at issue? and (b) how much do I value the contractual relationship going forward?
Michael Rasor is a partner at Cavitch. He assists commercial clients with disputes and business transactions. You may contact him at [email protected].