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The Coronavirus and Contracts

Do you have a sales or service contract that you cannot perform because of the corona virus? Do you face default on a lease or business loan because your business is closed or might as well be? Are you a business trying to enforce contracts when businesses and their customers are in quarantine? Many businesses and persons will not be able to perform on their contracts because of the coronavirus.

Contracts are generally sacrosanct at law, but this pandemic may change that. There are a number of legal doctrines designed to deal with catastrophic events. These defenses may help a business from being evicted for non-payment of rent, defend against a claim for breach of contract, and perhaps even forestall the declaration of default on business loan and foreclosure.

Here are some of them:

  1. Force majeure, basically an unforeseeable catastrophic event. This can be “Act of God,” like a tornado that destroys a factory, and in some cases even a labor strike.
  2. Impossibility, where an unforeseeable extreme event or situation prevents performance, e.g. the classic car to be restored has not been delivered to the shop, the property has burned down, a release has not been signed, or in some cases the unavailability of the key performer whose knowledge or talent
    cannot really be replaced.
  3. Impracticability, is like the doctrine of impossibility applied to the sale of goods (from software, factory equipment to retail products). In this case some major, unforeseeable event prevents performance, e.g. a shortage of key ingredient needed for manufacture, perhaps due to a disaster elsewhere in the supply chain
  4. Frustration of purpose, where because of an unforeseeable event the reason for the contract no longer exists, e.g. a painter who buys paint, or a builder who buys lumber, for a house that cannot be built.

Key elements of these defenses are the occurrence of an unforeseeable event not within the control of the defendant. In normal times and in most cases these defenses against a plaintiff’s suit for payment or other breach of performance would not be available because most events that prevent performance are foreseeable, e.g. goods or materials not being available.

But the coronavirus pandemic may be the paradigm case for the application of these defenses because it is both catastrophic and unforeseeable. Obviously, if the business is ordered to close, e.g. a restaurant, or its patrons are ordered to stay home, like a sporting event, performing the sale or service becomes impossible. And, neither the pandemic nor its worldwide depressive effects on the economy were foreseeable. Just a few weeks ago the stock market and the economy were at all-time highs. Now, we are entering an economically induced depression.

The legal effect of each of these doctrines is that it may excuse performance or allow delay of performance until the virus has dissipated and the economy begins to return to normal. The tenant, e.g. a restaurant owner, on a commercial lease may be able to postpone rent payments without being in default until the emergency has passed. The property owner or developer may not be able to demand performance or make a valid complaint against a contractor in court or with the Registrar of Contractors until workers are allowed to assemble without social distancing. The contractor may be able to delay payments for rent or materials because its customers have postponed contracts and are not allowing the contractor to enter the premises and do the work.

While these are tough defenses to make, it seems likely the courts will adopt a more expansive version of them under these circumstances. Even so, if you are on the enforcement end of contracts, contract law will apply as it always has. These defenses, if accepted, would be the exception. And, the defendant would have a high standard and burden of proof.

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Donald W. Hudspeth Attorney Photo
Donald W. Hudspeth
Principal Attorney

Attorney Donald W. Hudspeth has more than twenty years’ experience practicing corporate and business law. Before attending law school, Mr. Hudspeth held a stock brokers license at the age of 21 and owned his own business at the age of 23. He was a business law professor at Arizona State University, West Campus, and has conducted classes and seminars for a number of higher institutions and organizations. Mr. Hudspeth has published two books on law and is the founder of the radio programs Law on the Edge and Law Talk.

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Janae A. Perry-Meier
Associate

Janae Perry-Meier is a business and commercial law attorney focusing on international business. Janae handles both transactional and litigation matters, including: forming your business, drafting your contracts, franchising, business disputes, business divorce, mergers and acquisitions, private placements, securities compliance, and corporate governance. Janae also handles trademark registration, office action responses, and infringement cases.

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Michael David Malin
Associate

Michael Malin has been a practicing attorney in Arizona since 2013. He has represented clients through all stages of litigation. Prior to joining the firm, Michael litigated cases involving professional negligence, insurance bad faith, dram shop liability, personal injury and wrongful death, Indian law, probate, and criminal matters. Before attending law school, he worked for several startup companies in the then-nascent field of smartphone and tablet application development. test

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Robert J. McGee
Associate Attorney

Robert J. McGee is an Arizona native who has been practicing law since 2014. Robert’s primary experience is with all aspects of intellectual property – trademarks, copyrights, trade secrets, and patents. Robert has substantial additional experience with cyberlaw. He is an avid collector of esoteric knowledge and always takes an interest in the details of how each client’s business works.

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The scholarship is awarded to students for academic merit with an interest in business and business law. Candidates may have majored in fields other than business, have taken a break between college and law school, or have had exceptional life experiences.

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