As discussed in Part I of our commercial contracts series, we addressed the implications of force majeure clauses and why the language chosen by the parties and incorporated into their contract is of the utmost importance. The force majeure language may be boilerplate in nature and not result in the specificity needed to cover the COVID-19 pandemic, or your contract may have no force majeure clause at all, so the limited common law defenses to performance of impracticability or frustration of purpose would likely apply. Given the uncertainties and economic realities businesses are facing, the first step you should take is to reach out to the other party and try to negotiate a path going forward. The other party is likely equally unsettled and concerned about what the future holds. While the language in the contract may or may not be what you would hope had this crisis been predicted, consider how the parties can work together to modify the contract despite its language. Recognizing the challenges faced by all, adopting a voluntary and business-like approach will likely be the most beneficial initial strategy under these unique circumstances.
Should the parties to the contract agree on how to proceed, seek advice on drafting a modification to the existing contract. Specific issues and assumptions need to be addressed to ensure the modification protects you as much as possible. Managing the risk of moving forward on altered terms is a must, and again, the contractual language is key.
If the parties appear to be at a standstill, each party should consider allowing their outside professional advisors, such as outside counsel, attempt to negotiate/mediate, since such advisors are typically not as "close" to the dispute. Despite each party's best efforts, if it appears unlikely that the parties can amicably move forward, consider the following questions:
- Does your contract have a requirement to pursue dispute resolution?
- What type of notice requirements may be in play?
- What law governs and where would litigation take place?
- Is there an indemnification provision?
- What is covered?
- Are there liquidated damages set forth in the contract?
- Can the contract be terminated for other reasons that may be applicable?
- Given the current travel restrictions, how will potential litigation and/or arbitration be impacted logistically, and will this impact cost?
- Is there an arbitration provision; is it a sole arbitrator or a panel? This matters as the latter greatly increases the expense.
Additionally, and always important – is there a prevailing party attorney's fee clause? This can make for a wholly different risk analysis. While you may be able to recognize and manage the risk by paying your own attorneys to litigate the issue, what if you lose and must pay the other side's attorney's fees? How would this affect your business going forward? Is the other side collectible should you successfully pursue litigation? We anticipate there will be an increase in the number of bankruptcy filings and reorganizations. Should there be such a filing, there is an automatic stay or halt to all proceedings. Depending on the type of contract, the delay in resolution could have a significant impact. Instituting litigation can trigger such filings and may be counterproductive.
All of the above are factors that impact a decision on whether litigation is appropriate for a breach of a party's obligations under the contract. There are different approaches and claims that can be made.
