Evaluating How the COVID-19 Pandemic May Impact Your Customer and Vendor Contracts

This week, on the Insights Association message boards, I have noticed numerous conversations indicating client project cancellations as well as increasing difficulty in conducting focus group and other in-person market research as a result of the COVID-19 pandemic.

These responses to the pandemic may raise a number of questions depending on your circumstances:

Can my client walk away from a project without paying me for my work completed to date?
What happens if I can’t complete a project on time, will I be in breach of my agreement?
My client just canceled a project, can I terminate orders with my vendors?
How should I adjust my contracts going forward to account for issues that may arise because of COVID?

Many contracts specifically account for unanticipated events through a “force majeure” provision. These provisions generally allow for a party to delay (and sometimes terminate) performance in the event of an “act of God” or other specifically enumerated calamity (e.g., earthquakes, hurricanes, etc.). In order to invoke a force majeure provision, the cause for the delay must:

be beyond the reasonable control of the invoking party;
materially affect the performance of that party’s obligations under the contract; and
could not reasonably have been foreseen or provided against.

Market events that merely increase costs generally (for example, doctors suddenly requiring quadruple honoraria) would not qualify for protection under a force majeure clause.

A typical force majeure provision generally looks something like this:

Company shall not be liable to or through Customer for delays or inability to perform due to circumstances beyond its reasonable control, including, without limitation, fire, flood, explosion, severe weather, acts of God, acts of terrorism, civic commotion or acts of government.

For contracts entered into before COVID existed or perhaps before it went global, it is likely that the current situation constitutes a force majeure event under a standard provision like the one above. For agreements entered into only in the past week or two, perhaps not. Given recent events, “disease” or “pandemic” will likely feature prominently in most future force majeure provisions.

What happens if your contract does not include a force majeure provision or if you’re looking to simply cancel a project altogether? Force majeure provisions generally extend deadlines for performance – they do not (usually) provide for termination of the contract.

First, you should review your agreement’s termination provisions. Does the agreement allow for termination for convenience? If so, does the termination provision provide for what amounts would be payable? It may not be that painful to simply walk away from the contract.
Second, if there is no termination for convenience provision in the agreement or the contract allows for termination only with significant cancellation penalties, is there any argument that can be made to try to escape the contract?

The answer to this last question can sometimes be yes. There are three similar common law defenses that have the potential to excuse performance known as the doctrines of “impossibility,” “impracticability” and “frustration of purpose.” While each involves a slightly different test, in each case a party may argue that performance under a contract should be excused due to the underlying purpose of the agreement being overwhelmed by circumstances outside of such party’s control. Courts are usually reluctant to allow parties to invoke these contract defenses, but may be more willing in the well-publicized context of COVID.

These common law defenses apply the other way around with respect to clients seeking to cancel research projects. For example, if you were hired to conduct research in connection with the NCAA Men’s Basketball Tournament, given the recent cancellation of that event, the customer may have a reasonable argument to escape your contract under the “frustration of purpose” defense.

As you evaluate how your firm responds to COVID-19, you may want to consider updating your order documentation to account for additional disruption. As it would be difficult to argue that the COVID pandemic is unforeseen at this point, perhaps note specifically in your new orders that COVID may cause delays in performance timelines. Similar to the recent airline rebooking rules, you may want to consider establishing a COVID-specific rescheduling policy. For example, allow for customers to reschedule projects without cancellation fees and require that they complete the project before the end of the year.

While the current pandemic causes untold disruptions across society, it’s important to not allow yourself to be caught off guard by how it will impact your business and legal agreements.

Looking for more information on the response to coronavirus? See the Insights Association resource page.

This information is not intended and should not be construed as or substituted for legal advice. It is provided for informational purposes only. It is advisable to consult with private counsel on the precise scope and interpretation of any laws/regulation/legislation and their impact on your particular business.

NewsBusinessRuss Anderson