Defenses to Breach of Contract Claims Arising From COVID-19
COVID-19 (coronavirus) is a rapidly spreading, dangerous respiratory disease. The Centers Disease Control and Prevention (CDC) and other public health authorities have recommended social distancing as one of the keys to controlling the speed of transmission. As a consequence of this strategy, many businesses have been disrupted. Indeed, some companies in Texas have been forced to suspend part or all of their operations.
For a number of different reasons, your company may no longer be in a position to perform under a contract. In light of the COVID-19 pandemic, affected business may be excused from contract obligations without facing legal liability. At Sumner Schick LLP, our corporate attorneys are well-positioned to provide counsel to businesses during COVID-19. Below we explain force majeure clauses in Texas and highlight other common law excuses to non performance.
A Force Majeure Clause May Free a Business From Contractual Obligations
A force majeure clause is one of the primary defenses against breach of contract claims arising from the COVID-19 pandemic. Put simply, a force majeure clause is a bargained for contract provision that excuses both parties from their obligations under an agreement when an extraordinary event that was outside of the control of either party renders performance cost prohibitive, unreasonable, difficult, or impossible. Force majeure clauses can be invoked for many different reasons, including:
- Military conflict
- Significant labor disputes
- Changes in government regulations/policy
- Natural disasters
The COVID-19 outbreak could be grounds to invoke a force majeure clause. That being said, there are some complicating factors that must be considered. Even a valid force majeure clause does not offer companies carte blanche to escape the agreement. Instead, these provisions are interpreted narrowly with a careful focus on the specific language and facts of the case.
How force majeure clauses work in our state is perhaps best explained by a Texas appeals court in the case of Sun Operating Ltd. P’ship v. Holt. In this case, the court called force majeure “little more than a descriptive phrase” and noted that its scope and application is “utterly dependent on “the terms of the contract in which it appears.”
What does this mean for your company? It does not mean that your force majeure must refer explicitly to pandemics for it to be exercised during the COVID-19 outbreak. Quite the contrary, an unforeseen event could justify involving a force majeure clause. Still, not every contract that contains a force majeure will be sufficient to justify every type of non performance during COVID-19. Determining whether a force majeure clause can be invoked requires a comprehensive, fact specific inquiry into the unique circumstances of the case.
Alternative Provisions: Material Adverse Change/Material Adverse Effect
Some contracts contain a type of provision called a Material Adverse Change (MAC) clause or a Material Adverse Effect (MAE) clause. Most often, these types of provisions are found in purchase agreements, including in real estate contracts and merger and acquisition (M&A) transactions. As a general matter, MAC/MAE clauses give parties the right to avoid performance or terminate the contract when certain conditions are met. Depending on the specific circumstances of the case, the COVID-19 outbreak or the related government shutdowns may constitute a material change or material effect.
Three Common Law Defenses Against a Breach of Contract Claim During COVID-19
If your contract lacks a force majeure clause or any other type of similar provision to allow for modification/termination, all hope is not lost. A common law excuse for non performance may still be available to your company. Specifically, some common law defenses that could be raised in a coronavirus-related breach of contract claim include:
- Impossibility/Frustration of Purpose: In Texas, the doctrines of impossibility and frustration of purpose may excuse performance if a party’s performance is not reasonably possible based on an unforeseeable event that was not their fault. COVID-19 could allow for a defense on the grounds of impossibility or frustration.
- Commercial Impracticability: In contracts involving the sale of goods, the uniform commercial code (UCC) excuses performance on the grounds that an unanticipated change in circumstances make performance cost prohibitive.
- Violation of Public Policy: Finally, companies may be excused from performing contacts that would violate state or local public policy. For instance, if performance would violate a public health order in Texas, that may be a valid defense in a breach of contract claim.
How Our Texas Breach of Contract Lawyers Can Help
If your business cannot or will not perform a contract due to COVID-19, it is imperative that you notify your counterparty as soon as possible. Be proactive. By doing so, you will be in the best position to raise a defense in a breach of contract claim. At Sumner Schick LLP, our Dallas breach of contract lawyers are prepared to help. We will:
- Conduct an in depth, confidential review of your case
- Answer questions and explain your legal options
- Organize all relevant documents, records, and evidence
- Prepare a strong, well-supported breach of contract defense
Invoking a force majeure clause is complicated. Raising a common law breach of contract defense can be even more challenging. Whether a party has the right to escape contract performance due to COVID-19 is a face specific issue that must be evaluated on a case-by-case basis. Our Texas business lawyers can help your company determine the best path forward—whether that means repudiating a contract altogether, working toward a settlement/modified agreement, or preparing for breach of contract litigation.
Get Help From Our Dallas, TX Business Litigation Attorneys Today
At Sumner Schick LLP, our Texas business lawyers are committed to providing the highest standard of legal representation in an efficient, effective manner. If you have questions about defenses to breach of contract claims during the COVID-19 pandemic, we can help. For a strictly confidential, no obligation consultation, please contact our legal team today. From our office in Dallas, we serve communities throughout North Texas, including in Fort Worth, Arlington, Plano, Garland, Frisco, Grapevine, and Denton.