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CORONAVIRUS (COVID 19) AND PRIOR CONTRACTUAL OBLIGATIONS

WHAT IS THE LEGAL IMPACT OF CORONAVIRUS (COVID-19) UPON PRE-EXISTING CONTRACTUAL OBLIGATIONS? 

 

The coronavirus pandemic has substantially affected each of our lives and relationships in a multiple of ways, both permanently and temporarily. Over the past few weeks, I have been asked by a number of clients whether pre-existing contractual obligations are suspended and/or cancelled as a result of the pandemic.  There is certain to be extensive debate, litigation and evolving law on this issue as we navigate through and emerge from the shutdown.  In the interim, a brief discussion of a few legal concepts regarding the law of contracts may be helpful.

  1. Force Majeure. This legal concept allocates risk between contracting parties under circumstances that are beyond the control of either party and that substantially affect a party’s ability to comply with the terms of a contract. Examples of such events include war, strike, riot, crime, or an event described as an Act of G-D (such as weather-related catastrophes, earthquakes, fire and/or pandemic). While a force majeure clause in a contract may not permanently excuse a party’s non-performance entirely, it may suspend it for the duration of the event.

 

  1. Frustration of Purpose. This legal concept may excuse a party from performing under a contract and is triggered when a change in circumstances renders performance by one party worthless to the other party. For example, if a company is unable to open or transact business due to restrictions imposed by the COVID 19 pandemic, but the landlord continues to keep the premises open and accessible, the ability of the landlord to honor its obligations under the lease is meaningless to the tenant if it cannot access the building and operate its business.  Frustration of purpose is generally implied by law into each contract as an equitable concept. Courts will need to evaluate the circumstances of each case on an individual basis.

 

  1. Impossibility and Impracticability. A defense of impossibility permits a party to avoid obligations under a contract where performance is rendered impossible due to an unforeseen intervening act. Impracticability, on the other hand, requires a party to demonstrate that performance under the contract is rendered unreasonably more burdensome than was originally anticipated at the time the contract was signed due to an unforeseen act.  These defenses require the following triggering events: a) an unforeseen event; b) no express allocation of risk between the parties regarding the specific event; c) that the non-occurrence of the act was a basic, implied condition of the contract and d) the event has rendered one party’s performance impossible or impracticable.  As above, courts will need to evaluate each circumstance on a case by case basis.

 

  1. Illegality. A contract that requires a party to perform an illegal act is not enforceable as a matter of law. Thus, where a local, state or federal government issues an order or law that restricts, prohibits and/or bars activities that were legal at the time the contract was executed, this defense may be asserted to avoid a contractual obligation.  For example, a restaurant that is prohibited from conducting its business due to a mandatory government closure order may assert illegality as a defense to its lease obligations.  Once again, as illegality is an equitable concept, courts will need to make individual decisions on each case.

 

NOTE: The concepts described in this article are for general informational purposes only and does not constitute legal advice of any one case.  Each individual’s circumstances will vary and should be examined and fully discussed with competent legal counsel before taking any action.

 

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