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Much of the world is reeling from the effects of COVID-19, and another wave may soon be upon us. Nevertheless, the number of class-action lawsuits continues to rise with many alleging breach of contract — particularly for businesses that fail to deliver on the agreed-upon services and goods. For example, there has been legal action against airlines for flight cancellations, ticket brokers for failure to issue refunds for canceled events, closed gyms that continue to collect monthly fees, and universities pivoting from in-person instruction to an online delivery model.
It’s easy to assume that this onslaught of lawsuits is a direct result of businesses shifting their losses onto consumers, but it’s not that simple. Many defendants claim to have taken numerous steps to minimize the inconvenience and financial impact resulting from a situation that they maintain is out of their control. While some of these class actions may lack merit, businesses must defend themselves while protecting their public image.
COVID-19 affects businesses in all sectors, and in some cases, parties to a contract may be in breach of its terms due to the pandemic. How can anyone find a satisfying solution without compromising either party’s rights when “business as usual” regarding the performance of a contract, doesn’t necessarily apply?
If COVID-19 affects the performance of a contract, the injured party may be able to rely on the contract’s force majeure clause, providing that there is one. A force majeure clause protects the contract parties from events agreed to be outside the reasonable risk of doing business. Such provisions excuse the performance of contractual obligations if circumstances outside the parties’ control prevent performance. While COVID-19 might potentially qualify as such an event, a lackluster government response to the pandemic might not eliminate the legitimacy of a breach of contract lawsuit.
Doctrine of Impossibility
Force majeure is not the only legal theory a party might pursue to dodge its contractual obligations. Another is the doctrine of impossibility, which excuses a party’s contractual obligations due to unforeseen events beyond the parties’ control. For example, if an executive order makes performance impossible, a party may be able to sidestep its contractual obligations, although performance is generally delayed and not entirely excused.
Frustration of Purpose
If a party can’t perform a contract because of an extraordinary change in circumstances — so profound that the conditions are now vastly different than what the parties envisioned when they contracted — the agreement may be terminated due to frustration of purpose. However, this doesn’t mean a contract is frustrated because it’s merely become more difficult or costly to execute. A careful analysis of the contract’s precise provisions needs to take place since the same event could frustrate some contracts but not others.
Despite these challenging times, COVID-19 is not a get-out-of-jail-free card for contracts. Businesses should carefully review their contractual obligations and their ability to meet these obligations, despite severe disruptions. But, ultimately, organizations should seek any possible equitable remedies if they find themselves in the unenviable position of facing legal action for breach of contract.
For more information about equitable remedies in the current legal climate, view our webinar, “Emerging Claims and Trends in COVID-19 Litigation” today.
On Thursday, July 30th at 10am PDT / 1pm EDT, Everlaw’s Senior Federal Solutions Architect,...