Breach of Contract Coronavirus

Breach of Contract Coronavirus. Given the economic disruption, some contracting parties may seek to be excused from performance under their contracts.

How to get out of a contract?

There are many ways in which contractual performance has become and could become even more challenging. What COVID-19 coronavirus issues are complicating your contract?

• government-mandated quarantines
• travel restrictions
• supply shortages
• labor shortages
• demand reductions

In the wake of the recent COVID-19 pandemic, and its economic disruption, some contracting parties may seek to be excused from performance under their contracts.

For contracts subject to New York law, including insurance contracts, New York courts take a narrow view of defenses to contractual obligations based upon “unforeseen events” outside the control of the parties.

Below are some things to analyze pertaining to how to “get out of” a contractual obligation.

IMPOSSIBILITY OF PERFORMANCE / Breach of Contract Coronavirus

This is a defense for breach of contract. You might find your business on either end of this situation. You want someone, or a business, to honor their contract with you. Or, the other way around.

“[T]he excuse of impossibility of performance is limited to the destruction of the means of performance by an act of God, vis major, or by law.” Kel Kim Corp. v. Central Markets, 70 N.Y.2d 900 (1987).

Thus, if one party to the contract cannot perform due to an event that the parties could not have foreseen when negotiating their contract, the other party cannot recover for breach of contract. 407 E. 61st Garage v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 282 (1968).

In situations where performance becomes impossible, if proven, the impossibility of performance will protect a business from some, and potentially all, damages stemming from their failure to perform. The underlying facts matter.

If the performance is truly rendered impossible by the closure of a business that cannot operate as a result of the Govenor’s stay at home order, then it may be possible that contractual performance will be excused. Or, perhaps, the time to perform will be tolled until performance is no longer impossible.

FORCE MAJURE / Breach of Contract Coronavirus

The worldwide spread of the coronavirus requires lawyers to examine client contracts at risk for disruption or non-performance due to the epidemic. If the contract contains what is commonly known as a force majeure provision, a careful analysis of the clause is mandatory.

The force majure clause of a contract typically covers “acts of God” where you can argue the virus and its outcome was unforeseeable as a legitimate excuse for not being able to perform on a contract.

Note that Impossibility of performance is an affirmative defense to breach of contract for non-performance. However, unlike force majeure, this is not a contract clause. Instead, it’s an overall contract law doctrine. Under the current circumstances, this defense may be applicable. Specifically “supervening impossibility,” which is an acceptable defense when a party is no longer capable of performance under the contract due to an unforeseen act that was out of the control of the parties.

IMPRACTICABILITY / Breach of Contract Coronavirus

This is a similar defense to impossibility, but easier to prove. Under this defense, non-performance may be excused if an unforeseen event makes performance so difficult or expensive, that it becomes impractical as opposed to impossible. This defense is very similar to an impossibility defense, but instead of rendering performance literally impossible, this makes performance so overly unreasonably or excessively burdensome or expensive that it should be excused.

FRUSTRATION OF PURPOSE

This can potentially be used as a defense. This can be invoked when, after the contract has been executed, the primary purpose or basic assumption of the contract is rendered worthless or pointless.

UNIFORM COMMERCIAL CODE (UCC)

The UCC has a provision that could come into play for contracts of sale that are disrupted by the coronavirus.

Section 2-615(a) of the N.Y. U.C.C. provides that “delay in delivery or non-delivery . . . is not a breach under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”

BUSINESS INSURANCE

Check your insurance coverage. Can insurance cover your contract situation in any manner? Talk to your insurance agent.

The above defenses are generally difficult to prove, but these are unprecedented times. The courts may look more favorably of allowing the excuse of performance in light of the growing pandemic. Depending on the circumstances and severity of the situation, any of these could be a potential defense for non-performance. Keep in mind though, unlike force majeure, if these defenses are properly invoked, this will not suspend performance. Instead, under these impossibility defenses, the contract will be terminated completely by operation of law.

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