August 17th, 2020

Changing Contracts Amid COVID-19

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Author: Jamie Alvarado-Taylor, R. Aron Benjamin, Richard A. Loube

Signing Contract

The effects of COVID-19 have led to numerous contract disputes in all industries. Contracts often include a Force Majeure (or “Act of God”) provision, which provides for what happens when circumstances beyond a party’s control occur, such as a natural disaster or a global pandemic.

In the event that a contract does not include a Force Majeure provision, the parties are left to look for answers beyond the language in the contract itself. The party seeking relief from his or her obligations may resort to contract defenses such as impossibility of performance and frustration of purpose”.

In the current climate, as businesses continue to phase-in their plans for reopening in the face of an increasing number of cases of COVID-19, it is reasonable to expect that parties will take a fresh look at many of their standard contracts and add certain provisions to shift the risk to the other party.

Already, businesses and consumers are seeing added provisions to contracts, notably in the form of business to business contracts, such as commercial leases. In these new contracts, many of the provisions not only protect the party providing a good or service from instances of emergency scenarios, but also seek to limit potential defenses to any claim against enforcing a Force Majeure clause. Though most commercial leases include a Force Majeure provision, these provisions typically state that a tenant will be required to pay the rent, regardless of the circumstances and notwithstanding the fact that they may not be able to open. Not only does this eliminate the Force Majeure clause as a source of relief, but this may be construed as the tenant assuming the risk of unforeseen circumstances, which could also impede impossibility and frustration of purpose as available defenses.

As the country continues to live with the threat of COVID-19, businesses are starting to see the same type of language included in certain consumer contracts. For example, contracts forchildcare providers to home and auto insurance policies, are including broader Force Majeure clauses as well. As we enter this new phase, Stein Sperling’s Business and Litigation teams are monitoring a host of new Force Majeure provisions among other relevant provisions to be included in contracts in a wide range of industries. Therefore, every business and consumer should undertake an in-depth review of all new or renewed contracts for novel contract clauses that seek to shift the risk of unforeseen circumstances onto the other party.

You can find more on issues affecting businesses and individuals in our COVID-19 Resource Center.