The COVID-19 pandemic has had an unprecedented effect on businesses of all kinds. Many organizations find themselves struggling, for various reasons, to fulfill their contractual obligations. In some situations, it may be impossible to fulfill a contract, while in others, it may be possible to meet the terms of the agreement by offering a substitution or alternative to the goods or services initially discussed. Another option might be to delay fulfilling the contract until a later date. Under what circumstances is it acceptable to amend or cancel a contract? How does the rise of COVID-19 affect business and contract disputes?
Government actions and restrictions
As well as the impact of the disease itself, with the tragic loss of life and health that it has brought, businesses must confront the effects of government interventions to limit the spread of the virus. While necessary from a public health perspective, these interventions have had a significant impact on businesses across virtually every sector. Some industries — notably hospitality and travel — have been affected more dramatically, but all sectors are feeling the pressure created by these new restrictions.
We might point towards the ‘lockdown’ strategies deployed in many regions. The closure of businesses deemed non-essential, and the introduction of social distancing has caused significant disruption, especially when these measures have moved from voluntary to mandatory. Supplies of raw materials have been disrupted. Staff have become unavailable. Transportation has been affected by these restrictions, whether by road, rail, sea, or air.
In law, it’s a basic tenet that if a party breaches a contract, that party is liable to pay damages. There are defenses, however. These fall into three general categories: impossibility/impracticality, the frustration of purpose, and force majeure.
Put simply; this defense is valid when it is simply no longer possible to carry out the terms of the contract. If, for example, the contract specifies that a singer or actor will perform a show at a particular venue, but government interventions result in such places being closed, then impossibility would be a reasonable defense. Neither party could reasonably have foreseen the rise of COVID-19, nor could they have anticipated that the government might need to close venues because of the virus.
Impracticability is a similar defense that may be available in some jurisdictions. If the fulfillment of a contract is theoretically possible but would be excessively difficult, complicated, or expensive, it may be possible to mount a defense of impracticability. This excessive burden can’t be the fault of the defending party, nor can it be due to something that was reasonably foreseeable.
Frustration of Purpose
Frustration of Purpose is somewhat similar to the impracticability defense, in that the contract could still be carried out. In the case of frustration of purpose, however, carrying out the contract is no longer reasonable as its purpose has been obviated. In the example above, where performance could no longer take place due to the venue having been closed, it might no longer be reasonable to fulfill a contract to provide lighting or sound services for the performance. The equipment and personnel might still be available, but there would be no sound to amplify or performance to light, nor an audience.
‘Force majeure’ is a contractual provision which excuses parties from their contractual obligations if some circumstance beyond the parties’ control prevents them from fulfilling those obligations. It’s easy to see how government restrictions due to COVID-19 could reasonably fall under force majeure.
We can see, therefore, that those who find themselves unable to fulfill their contractual obligations may be able to defend themselves against legal action. As long as they can show that it is the situation related to COVID-19 that has caused the issue, and not some negligence or lack of effort on their part, there are various defenses that might be open to a party who can no longer fulfill a contract in these complex and troubled times.