Is Your Business Bound to Its Contracts During A Pandemic? Contractual Obligations and Defenses in the Era of COVID-19
The business landscape is changing in unprecedented ways and companies across the spectrum are grappling with how COVID-19 will impact the contracts they have entered into with customers, suppliers, lenders, landlords, and business partners alike. While the default rule in Minnesota (and across the U.S.) is that parties are generally bound to their contractual obligations even in times of crisis or pandemic, there may be important exceptions that can have a big impact on your business. Here are some things to consider:
- Force Majeure: Read your contracts carefully. Many contracts have “force majeure” provisions that will excuse some or all of the parties’ obligations when circumstances beyond their control make the performance of their duties impossible. The details of what circumstances justify the cancellation of contractual obligations significantly depend on the specific language in the contracts (i.e. acts of God, natural disasters, governmental orders, etc.). Typically, the specific event in question has to be articulated in the contract in order to excuse performance.
- Impossibility, Impracticability, and Frustration of Purpose: Even if your contract does not have a specific “force majeure” provision, Minnesota law provides businesses with potential alternative avenues to cancel contracts or excuse obligations, albeit under exceptional circumstances. When events beyond a party’s control make honoring a contract illegal or impossible, or if the underlying purpose of the contract no longer exists, the law may allow some temporary or permanent relief from contractual obligations for as long the superseding events exist. However, courts have routinely rejected the excuse that it is too expensive to perform a contract as a valid basis to avoid a contractual obligation. There has to be clear impossibility or frustration of purpose for relief to be granted.
- Governmental Orders: While many businesses have been severely restricted by recent state and federal orders, recent legislation and executive orders have also provided relief, aid, and options for businesses suffering the economic effects of the COVID-19 and mitigation measures. Read the law, know your rights, and consult with legal professionals who can help you navigate the red tape.
- Material Breach: Minnesota law provides that when one party to a contract materially breaches the contract by failing to meet its fundamental obligations, the other party may be excused from performing its duties under that contract. Depending on the situation, the best response to a contract partner substantially failing to meet its obligations may be cutting ties and simply walking away from the agreement – especially if continuing to honor your part of the bargain will be a serious financial burden. Make sure you are on solid legal ground before ceasing your performance.
- Mitigation: No business or industry is going to completely escape the effects of COVID-19. The likely reality is that customers are going to have difficulty timely paying their bills, suppliers will have a harder time providing product, contracts will be breached, and losses will be sustained. The best defense your business can have is being proactive about finding solutions, identifying new opportunities and partners, and taking all the steps necessary to mitigate and minimize the damage to your bottom line.
Our firm is actively handling these dilemmas for clients across every industry and we stand ready to help Minnesota, midwest, and national businesses navigate the new legal waters of COVID-19. If you have questions about your contractual obligations during COVID-19 and how to mitigate the damage to your business, Tyler Brimmer can be reached at email@example.com.