The spread and response to COVID-19 had had a significant impact on businesses, including the contracts you signed before the epidemic started. Unfortunately, there can be disastrous consequences when government orders and health precautions keep you from fulfilling your commitments.
Our firm can provide knowledgeable guidance on many issues, including:
- Contractual protections under force majeure clauses (and other provisions related to unforeseeable circumstances beyond the parties’ control)
- Insurance claims related to business interruption
- Government regulations
Some contractual remedies are available for only a short time, and it is essential to know your options so you can act quickly.
When do force majeure provisions apply?
The term “force majeure” refers to an outside force that is outside the control of the two parties of the contract. In Kel Kim Corp. v. Cent. Markets, Inc., the court determined that force majeure clauses were “clauses excusing nonperformance due to circumstances beyond the control of the parties…” [1]
Contracts often contain a force majeure clause to prepare for situations where the parties are unable to perform their duties in the agreement. Many businesses did not anticipate the impact or government response to COVID-19 during the negotiation and have been unable to fulfill their contracts.
This is a valuable time to review your contracts for provisions that could apply to this unique situation. A force majeure clause or another similar provision could excuse nonperformance in your agreement. The result will depend both on the actual impact on your ability to perform and the language in the contract.
Contractual impossibility and frustration of purpose
There are times when a contract becomes impossible to complete in a way that neither party could have anticipated. A court may find your contract impossible if there is an event that prevents performance, and the contract does not expressly allocate the risk to either of the parties. When this happens, one party may be excused when they are unable to perform.
When dealing with contractual impossibility, it is crucial to consider that it happens under extreme circumstances. While there are times when a contract may become more challenging to perform, contractual impossibility deals with when one party cannot perform.
In some cases, the contract does not become impossible to perform, but the benefit, or consideration, no longer has the same value. During a negotiation, both parties are seeking a specific benefit. When there is a catastrophic, unanticipated event that changes the value of the contract for one of the parties such that it no longer would have induced them to enter into the contract, the event frustrates the purpose of the contract.
A frustration of purpose clause may not completely excuse a party from performance. Depending on the language of the contract, there may be some relief for a party who would otherwise not receive the negotiated value of the contract.
When your performance of a contract is catastrophically impacted by unexpected events and government orders, such as during the COVID-19 pandemic, it is important to consult with a knowledgeable attorney who can help you create a plan to avoid severe consequences for your business.
Insurance claims for business interruption and civil authority
Commercial insurance policies often have clauses that discuss what should happen when there are interruptions in business that result in “direct physical loss or damage” to your business’ property because of a catastrophic or unforeseen event.
For example, in the event of a fire, a business may sustain both physical losses, as well as downtime while recovering the catastrophe. Depending on the language of the provision, the policy may cover repairing or replacing physical equipment as well as the financial loss while employees are unable to work.
Currently, state, local and federal government mandates are telling business whether they are essential and should continue operating. You might be wondering with the COVID-19 orders, whether your business’ inability to perform falls under your insurance policy.
Unfortunately, there is no one-size-fits-all answer to the situation. The remedies that are available to you will depend on the specific language in your insurance policy, so a solution that is available to you, may not be available to someone else with a similar business dealing with the same circumstances.
It is essential to review your insurance policy with a knowledgeable attorney who understands your policy and your business so you can learn about what options are available to you.
We can help you pursue your business interruption claims. We have litigated many insurance denials claims to help businesses get through the hardship of closure or decline.
[1] Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 902 (1987).
