Contract Cancellation & Covid-19

By Walter Lau

Cancelling a Contract During a Pandemic – Force Majeure

covid-19

Covid-19 and Contract Cancellation – Force Majeure

Parties to a contract will sometimes want to get out of the contract or cancel it. Listing all of the motives a party may have to cancel a contract is impossible, but the ways to get out of a contract have been litigated for centuries.
One of the most interesting ways of cancelling a contract is called Force Majeure, or if a Seller is selling goods under the UCC, Commercial Impracticability. In times of pandemic, such as novel Coronavirus, Covid-19, commercial businesses, retail outlet operations and consumerism are interrupted. Mass shut downs lead to production delays, workforce and resource unavailability, and lower demand on the consumer side. This leads to contracts not being as valuable as they were during normal times or performance becomes so impracticable, it is not worth performing, and thus a party may want to cancel the contract. Force Majeure is often addressed in the boilerplate section of a contract and because canceling a contract using Force Majeure is rare, inexperienced drafters and attorneys often overlook the importance of a well-crafted Force Majeure clause, which may cause problems when trying to cancel a contract.

The instances when Force Majeure may be invoked include more than just pandemics. Just think of all the scenarios where a contract becomes impossible or so costly the parties may not want to continue, earthquakes, war, biblical level events, etc. However, think of the situation in the current Covid-19 pandemic of mask producers. N95 and other high filtration masks are a hot commodity and highly in demand right now. Mask producers are being asked, and perhaps told, to supply their masks solely to the healthcare industry, and for good reason. However, Lowes, Home Depot and countless “mom and pop shops” can no longer get their masks to sell to consumers. Most of these retail outlets will have a “requirements” contract with a supplier, whether it is a distributor or manufacturer, which says the supplier will supply all the masks the retail outlet requires. Now the supplier can no longer supply the mask to Lowes or Home Depot because all of the masks are being sent to hospitals around the world to protect the healthcare workers from Covid-19. What recourse and relief can the retail outlets seek from the suppliers and will they win on their arguments? In the current Covid-19 pandemic, it appears the retail outlets will have no chances of winning as the suppliers can use Force Majeure or commercial impracticability as an excuse for non-performance, unless the contract says otherwise. The specifics of each case will definitely vary due to contract terms, but this provides an example of how a Force Majeure clause or commercial impracticability can be used to cancel or get out of a contract.

Every contract is unique, and with the contract comes unique circumstances. Even if a Force Majeure clause is identical in two contracts in the same general industry during the same pandemic, there may be two different outcomes. For instance, compare the N95 mask producers example to a lumber supplier, where the supplier’s lumberjacks refuse to go-to work due to fears of Covid-19 and therefore cannot supply Home Depot with the lumber the store requires. Is claiming the Covid-19 pandemic triggers Force Majeure enough for the supplier to cancel the lumber contract?

The analysis of whether a contract can be canceled we must first determine if there is a contract? If there is a contract is it a contract for services, the sale of goods or both? Depending on the answer, we either follow the UCC or common law for the rules regarding contracts. An experienced attorney needs to review the contract for the clauses regarding Force Majeure and commercial impracticability and interpret the likely outcome of cancelling a contract based on those two legal doctrines. The contract may make specific exceptions to Force Majeure or commercial impracticability. For example, the contract may say pandemics are not a cancelable event. If however the contract is silent, or is incomplete regarding Force Majeure or commercial impracticability then we must follow what the established rules are within the relevant jurisdiction, which may include extrinsic evidence. We must also determine from the contract, the laws, or both, what the steps are to properly cancel a contract based on Force Majeure or commercial impracticability.

If you have a contract and would like to know if Force Majeure or commercial impracticability are relevant to you or your business during the Covid-19 pandemic, give us a call or leave a note and we can review your contract for you.

About the Author

Walter Lau is a named partner at Lau & Nicolello, LLC. He holds a JD from New York Law School and his Bachelor of Arts from the University of Maryland - College Park. Walter is licensed to practice law in both New York and New Jersey and has handled business purchases and sales, insurance subrogation, UCC disputes, Criminal and Municipal Court appearances, and personal injury lawsuits.