Who bears the risk if a contract can’t be fulfilled due to a Covid-19 hardship?
Who bears the risk if a contract can’t be fulfilled due to a Covid-19 hardship? It is important for businesses to review any existing contracts they believe could be affected by these disruptions. When reviewing your contracts consider these measures:
- Identify the “choice of law” or “governing law” provision in the contract. Does the contract provide that a particular state’s laws will be used to interpret the agreement?
- If there is a force majeure clause, review the language to see whether specific applicable terms are included. In general, Virginia courts will not allow more general “act of God” language to completely relieve a party of their contractual obligations unless the nonperformance was completely outside of the party’s control. Consider whether there are alternative means to perform contractual obligations or proactive steps that can be taken to minimize the potential consequences of a breach and/or default.
- And make sure to comply with the contractual terms regarding notice requirements that have been provided to preserve your ability to invoke that clause
- No force majeure clause? An agreement may contain a provision having the same effect as a force majeure clause without using those words. For example, a contract might contain a section called “Termination” or another catch-all provision that may list events that will allow nonperformance. If your contract does not contain such a clause, Virginia courts may still be willing to excuse non-performance or delay if it is impossible to perform or the whole purpose of the contract is frustrated.
- Consider negotiating a written amendment to the contract to reflect a commercially reasonable resolution.
- If you are entering into new contracts, keep in mind what you can actually accomplish and when you can accomplish your contractual obligations if there continue to be Covid-19 related impacts for the next several months or over the next year. You will likely not be able to use the Covid-19 impacts going on longer than expected to excuse performance for contracts entered into after the crisis started.
- Act consistently and adopt well-developed legal strategies. Consider how your response may impact your long-term relationship with your contract partners. Also consider how taking different approaches depending on what side of the transaction you are on may impact your ability to defend your positions later on.