It goes without saying that ‘shelter-in-place’ and other public health mandates to stem the spread of COVID-19 are having severe impacts on our economy. These public health mandates have forced businesses to profoundly alter their business models or, in many cases, shutter entirely. This invariably has had an impact on the ability of businesses and contract workers to fulfill their contractual obligations.
So how does COVID-19 affect contractual obligations and liability? Unfortunately, there is no uniform answer to how COVID-19 can change contractual obligations. As with many things in law, the answer is that it depends on the circumstances and the language of the contract itself. For these reasons, we always recommend seeking the advice of a lawyer on your specific circumstances. However, here are some guidelines businesses can use:
First, look to the contract itself. Many contracts, particularly those that were well-drafted by a lawyer, will have language that specifically deals with what happens when external events impact one of the party’s ability to fulfill their duties. Generally, these are termed “Force Majeure” clauses, but they could be under headings addressing delays, termination, or delivery/performance timelines. Such clauses are typically drafted to release one or both parties from their obligation to provide services or make payments where external, unforeseen circumstances that are not the fault of either party. Depending on how they’re written, government-mandated shutdowns or restrictions impacting the business should be sufficient to trigger these clauses. If necessary, it may be helpful to engage the services of a lawyer to advise on how the contract should be interpreted.
If the contract doesn’t specifically address what happens in unforeseen circumstances, then the parties must rely on the guidance of the Common Law. This is the collection of precedents set down by the various courts in similar circumstances. Unfortunately, there are understandably exceedingly few cases that specifically address global pandemics or the government-mandated shutdown of entire industries.
That said, the courts have addressed similar situations before with what has become known as the doctrine of “frustration of contract.” How the doctrine is applied is highly fact-specific, but the basic principle is that if outside events have made performance impossible, or have made the objects of the contract fundamentally different than was originally agreed to, the contract will be considered “frustrated” and the affected party will be relieved of their obligation to perform. Unfortunately, it is not enough that performance is made more difficult or expensive as a result of that outside circumstance, meaning that “frustration” will not be a help to a great many businesses.
That being said, the common law is constantly evolving, and it remains to be seen how the courts will react once the deluge of COVID-related cases begins to flood the courts once they do finally reopen. As mentioned above, global pandemics are not something that has been truly contemplated by the courts before, so it may well be that from these exceptional circumstances will come a new and more expansive way of applying the doctrine of frustration.
Unfortunately, time and monetary constraints will often overpower the strict legal rights of the parties. As of the time this article is published, courts are not hearing new cases and are unlikely to begin any time soon. Many businesses will not be able to wait for however long it takes for their case to be heard, nor afford the often tens of thousands of dollars it would take to litigate it all the way to a decision. Nor might they be able to collect on whatever the courts may decide, as a business that is struggling (or refusing) to fulfill its obligations might not have much to collect on once the storm of COVID-19 has passed.
As such, it will frequently be up to the parties themselves to decide how to address the difficulties the pandemic has created. This may include formal written solutions like change orders altering fulfillment or payment timelines in construction contracts, rent deferment agreements for commercial and residential leases, or termination and mutual release where it makes sense for the parties to simply part ways. Or more informally, parties may agree to reschedule service dates (e.g. rescheduling catering, photography, or event-planning services for a wedding or other event that must be postponed).
Many businesses may also be entitled to relief outside of the contract itself from government benefits or business interruption insurance. We have prepared a handy list of resources for possible sources of assistance that businesses may be able to access, which you can find at https://www.hammerco.net/covid-19-resource-centre/corporate-commercial/support-for-businesses/
It may also be possible for businesses that have been paying for business interruption insurance to make a claim against their policy. Unfortunately, whether those claims are eligible will depend on the specific terms of the policy and whether the insurer is willing to honour it.
The lawyers at Hammerberg are equipped to assist businesses no matter which of the above categories are most applicable to any particular scenario. This could include interpreting contractual language, drafting new documents to formalize negotiated agreements, negotiating settlements, or assisting with claims against defaulting parties or insurance companies that are refusing to properly honour and pay out on policies business have been paying for.
Contact us for more information.
Written by: Liam Bath