Contract Issues

 

You may have obligations under a contract you can no longer perform, or you may be on the other side of a deal that the other party cannot close because of market interruptions.  Some of the legal considerations are: 

 

Material Adverse Effect or Material Adverse Change Clauses:

  • COVID-19 may constitute a material adverse effect on a contracting party due to various business closures and mandated social distancing coupled with the tanking economy.  Review the relevant contracts to determine if they have clauses that address materially changed circumstances.

  • It is important for sellers involved in such agreements to be prepared for the possibility of deals falling through in light of the COVID-19 pandemic, and a professional review of the terms of the purchase agreement, and particularly these clauses, will be useful in assessing the viability of a purchase agreement.

 

Force Majeure:

  • Force majeure clauses in contracts excuse performance by one or both parties where an unexpected “act of God” (natural disaster, riot, war, etc.) makes performance impossible or impractical.  Such provisions may or may not specifically enumerate an epidemic as a force majeure event.

  • Courts generally interpret force majeure clauses narrowly and whether an interruption due to COVID-19 is within the force majeure clause in your contract depends on the specific language of the clause.

  • Under New York law, the party seeking to avail itself of the clause has the burden of (1) demonstrating the existence of a force majeure event; (2) that it tried to perform its contractual obligations but was unable because of the event; and (3) that the event was unforeseeable.

 

Impossibility and Frustration of Purpose:

  • Even a contract without a force majeure clause may be avoided under common law principles such as the doctrines of impossibility and/or frustration of purpose.

  • New York law recognizes the defense of impossibility for nonperformance on a contract in situations where an unforeseen event has rendered the means of performance under the contract objectively impossible. Whether COVID-19 would qualify as a circumstance rendering performance impossible depends on the nature of the contract, but the sweeping government-mandated shutdowns of various businesses (particularly in the entertainment, service, and retail sectors) may be a basis to argue impossibility in many contexts.

  • Under New York law, frustration of purpose occurs when an event or circumstances render one party’s performance under a contract virtually worthless to the other and thus the purpose of the contract is frustrated. As with impossibility, the terms and type of contract are key in the determination of whether a party can argue frustration of purpose based on COVID-19 circumstances.

  • One takeaway from this pandemic is to consider drafting contracts with specific language to include or exclude events such as “epidemics” or “pandemics” depending on your goals in drafting the contract.

 

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