COVID-19 and its effect on contract performance
Last updated March 16, 2020
The spread of COVID-19 (“COVID-19”) has caused notable disruption to everyday life and brought with it a number of contract considerations. CSG is assisting its clients to navigate actual and potential contract issues caused by COVID-19. As clients face contractual obligations that they or a counterparty cannot perform, they must keep in mind some key contract provisions:
1. Force Majeure. These provisions may excuse a party’s performance under a contract due to circumstances beyond their control. Such provisions are already being invoked due to the impact COVID-19 is having on businesses. Interpretation of these provisions differ between contracts and are highly fact-specific based on the explicit language of the provision. In reviewing their existing contracts, clients should pay attention to the specific language used, if any, to define “acts of God” and other Force Majeure “events”. In interpreting these provisions Courts give weight to when the provision was negotiated, the foreseeability of COVID-19’s effects on the invoking party’s business and the actual effect COVID-19 had on the business.
2. Material Adverse Events/Changes. These provisions set forth when a buyer is permitted to terminate a transaction. As COVID-19 continues to spread and federal, state and local governments react, contracts with defined material adverse effect and/or material adverse change provisions may trigger a party’s termination right. Similar to Force Majeure provisions, material adverse event or material adverse condition provisions are fact-specific and may turn on what specific terms are included. Due to the quickly changing status of COVID-19 and its impact, courts may view a party’s prospects in long-term M&A contracts versus short-term debt financing contracts differently.
3. Supervening Events Excusing Performance. These are events that occur after a contract has been executed, but prior to the completion of performance, and impact the parties’ basic agreement-related assumptions. Oftentimes the happening of these events may excuse a party’s performance because of impossibility, impracticably or frustration of purpose. Rapidly changing public health rules and regulations resulting from COVID-19, such as restrictions on public gatherings, can affect parties’ basic assumptions as it pertains to contract performance.
4. Promises or Covenant. Oftentimes agreements require that one party’s performance satisfy the judgment of a counterparty, beneficiary or a third party. If performance is unsatisfactory, a party’s performance obligations may be excused.
Contract interpretation is fact-specific and requires a case-by-case analysis of the potential effects and ramifications of COVID-19.
To discuss your contract, or for more information and updates, please contact your CSG attorney.
For additional information pertaining to the coronavirus outbreak, please visit CSG’s COVID-19 Resource Center.
This publication contains general information on recent legal developments and is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. Attorney Advertising. Prior results do not guarantee a similar outcome.