Contracts, Coronavirus, and Force Majeure: How Does COVID-19 Affect Contract Obligations?

When I was a first year law student I learned about contract formation, contractual obligations, and breach of contract. We also learned about a term called Force Majeure. You may have recently seen the term.

Force Majeure is a French term that means something along the lines of “superior or irresistible force”, but it is also a term used in conjunction with contract law. In the context of contract law, force majeure is an uncontrollable event that prevents a party from fulfilling their contractual obligations. Force majeure is commonly thought of as a provision included in the terms and conditions of a contract. But, because “uncontrollable events which prevent a party from fulfilling their contractual obligations” seldom occur, especially on a wide spread basis, force majeure provisions aren’t invoked very often.

I have reviewed many contract provisions meant to excuse a party’s performance under a contract when circumstances beyond their control (such as wars, strikes, government actions, Acts of God, natural disasters) make it so that they can’t perform their obligations, but the events meant to invoke or trigger such contract provisions don’t occur very often. The current COVID-19 outbreak may qualify as such an event, especially in light of the fact that World Health Organization has declared COVID-19 a pandemic and the Governors of Oregon and Washington have issued shelter in place orders and have prohibited many commercial activities. The coronavirus pandemic will cause numerous businesses to not be able to perform their contractual obligations.

A business unable to perform its contractual obligations as a result of COVID-19 should determine if their contract includes a force majeure provision which excuses or delays their performance because of an uncontrollable event, such as the current outbreak. Because of the widespread affect coronavirus has and will have on the ability of a business to fulfill their contractual obligations, force majeure provisions will likely become heavily debated. Professionals across the country have already begun to discuss force majeure provisions and their effect on contract obligations.

Whether or not a force majeure provision excuses or delays a party’s obligation under a contract depends upon the specific language of the provision and the surrounding facts and circumstances. Every situation is different. But, even if a contract does not include a force majeure or similar provision, there may be other legal doctrines that excuse or delay performance, including impossibility or frustration of purpose. This is especially true in light of the recent government stay at home orders and prohibition of many commercial activities. In addition, as a general rule, recognized legal treatises hold that performance prevented by an act of God or other uncontrollable event may be excused.

The outbreak has had an adverse impact on many businesses. It is my hope that parties to a contract will act promptly and honor their implied duty to act in good faith and deal fairly with one another while addressing the adverse affects of the outbreak. If so, it won’t be necessary to argue over whether or not a contract provision, government action, or legal treatise excuses a party from performance under a contract.

If the outbreak has or will affect a party’s ability to fulfill their contract obligations, they should promptly notify the other party to their contract. The sooner the better. We don’t know how long it will take for the situation to improve. Document your communications. Provide details with regard to the impact on your business.

Whether the outbreak causes a business to not be able to provide the goods or services they contracted to provide or delays their ability to do so, or causes them to not be able to pay their bills, rent, or mortgage, if they want their performance to be excused or delayed they should act promptly and be transparent. If concessions or delayed performance are being sought by a party to a contract, they may be asked if they have sought assistance through the government relief programs or insurance coverage. Parties seeking to be excused from performance under a contract should be prepared to provide financial information regarding the impact of the outbreak and a business plan to address the impact.

Because every situation is different, if your business has or will be unable to perform your contractual obligations because of the outbreak, you should consider consulting with an attorney. Samuels Yoelin Kantor is available to assist with the legal issues raised by the COVID-19 outbreak.  If you need legal advice or guidance, please feel free to reach out to us. Even if we’re working remotely, we’ll promptly get back to you.

Van M. White III has more than 20 years of experience as a lawyer in Oregon and Washington. Van has been a partner at Samuels Yoelin Kantor since 2001 and has served on the firm’s management committee since 2010.

Due Diligence: Just Who Are You Dealing With?

DO YOU KNOW WHO YOU’RE DEALING WITH?

Due Diligence Before You Enter Into An Agreement

I’ve represented a number of clients over the years who failed to perform any due diligence with regard to the party they were contracting with before they entered into the contract. Had they performed some quick and easy due diligence before they signed the contract, they would have saved themselves a lot of headaches, hassles, and money.

Before you enter into a contract and obligate yourself to do something, take some time to learn about the other party. If you are entering into an agreement with a business entity (e.g. corporation, LLC), check the Secretary of State/Corporation Division website to learn about the entity. You’ll be surprised the number of situations I’ve seen where clients entered into contracts with defunct or non-registered entities. Find out who the principals of the entity are. The Oregon Secretary of State website enables you to do a business search by individual– whereby you learn of the businesses (active and inactive) for which an individual has been an owner or corporate officer. Red flags include individuals who started numerous businesses in the past and businesses that fail to file annual reports and pay annual fees.

If the person or entity with whom you’re negotiating provides services which requires a license or registration (i.e. contractor, realtor, medical professional, etc.), you should be able to search on-line records regarding their licensing history and complaints. Red flags include numerous complaints, suspensions, or an inactive license/registration.

If you are contracting to perform work on real property, perform research with regard to the ownership of the real property (after obtaining a good address for the property) to determine who  owns the property and who has authority to allow work to be performed on the property. If you cannot locate on-line information with regard to the subject property, contact a local title company and ask for a trio or list-pack for the property.

In light of the amount of information available on the internet these days, you should also consider doing a Google or Bing search with respect to the potential new client and/or their principals. You might be surprised as to the amount of information available about them on the internet.

Your time is valuable. You don’t need to be dealing with individuals or entities who have bad intentions or who are deceptive. You’re probably better off taking a vacation to the beach or the mountains than you are dealing with unscrupulous people. Take some time to learn about the party with whom you will be dealing before you obligate yourself or your company. You may find out that they aren’t who they claim to be. Such time is time well spent. The time spent performing due diligence before you enter into the contract could be as important as the time spent fulfilling your obligations under the contract. As the old Benjamin Franklin quote goes, “an ounce of prevention is worth a pound of cure.”

Pay Me Now Or Pay Me Later

The Importance of Using a Lawyer Before You Encounter a Problem

Legal disputes can be very expensive, very risky, and very time consuming. In my experience, most disputes could have been avoided if the client had sought the assistance of a lawyer before they entered into the agreement or transaction that was the basis for the dispute. Unfortunately, many people don’t see an attorney until after a dispute has arisen. At that point, it is often too late to undo the damage and the client spends substantially more time and money addressing the dispute than they would have if they had sought the assistance of a lawyer before they signed the contract or started the project.

Such experiences cause me to think of the old Fram Oil Filter ads – the ones that said, “You can pay me now or pay me later.” Fram’s message was that you ought to pay a small amount of money to regularly change your oil filters rather than a whole bunch of money later to fix the problems caused by not maintaining your oil filters. The Fram Oil Filter ads imply, as I advocate in this article, that it makes better sense to pay a little for some prevention early on rather than paying a whole bunch more later when a problem develops. I believe the same can be said for the use of lawyers.

Before signing a contract, entering into a transaction, or starting a new venture, you should weigh the risks of the actions you are about to take. You should also perform a cost-benefit analysis to help determine whether you need to use a lawyer to assist with addressing the risks in the contemplated venture or transaction. The more risks you take on, the more important it is to use a lawyer to assist with the transaction or business venture. This may even be more important in the current economy when profits are not as easy to come by as they were a few years ago.

While it may only take a few hours for a lawyer to review a contract, form a business entity, or provide you with advice about a transaction, the amount of hours necessary to prosecute or defend a business dispute can be staggering. Many disputes that I have seen could have been avoided if the client had an attorney provide them with a few hours of advice before they got involved with the project. In addition to providing specific legal advice regarding the contemplated transaction or business venture, the right lawyer can also provide valuable general advice based upon their years of experience and experience with similar matters.

In addition to providing legal advice about a contemplated venture or transaction, I also have some general advice I’ve found to be valuable to clients regarding contemplated transactions or business ventures:

-Listen to your gut and the gut of your business partners and spouses. I have seen a number of disputes where one or more of the parties affiliated with our client felt early on that something was not right about the transaction or the parties with whom they were dealing. In hindsight, clients have informed me many times that they wished that they had listened to their gut or the gut of their business partners and spouses;

-Be very careful when the other party to your venture or transaction asks that you do things differently than you have done in the past. This is a red flag. Watch out. If you have never previously dealt with the other party, you may want to require that the venture or transaction be handled in a manner similar to how you have handled it in the past.

-Be very careful if the other party to the contemplated venture or transaction tries to require that you utilize a contract or documentation that differs from what you typically use for similar transactions or makes you feel uncomfortable. If there is a dispute regarding the transaction, the written contract and related written documentation will be the primary documents upon which the judge or arbitrator will render their decision. Also, make sure that any changes to the agreement or transaction are documented in writing.

If used in a preventative manner and timely manner, you can get good value from a lawyer. If, however, you wait until after a dispute has arisen to see a lawyer, it will likely be much more costly and time consuming. I suggest that you take the advice of the Fram Oil Filter guy and pay a lawyer a little for some legal advice before entering into the transaction or business venture. Otherwise, you will likely have to pay the lawyer a whole lot more later after a dispute arises.