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COVID-19 and Contracts – Assessing Business Liability for Breach

April 07, 2020

COVID-19 and its effects are forcing businesses across the nation to critically analyze operations. 

Some are getting creative to keep operations going. Others are simply unable to move forward in the current business environment and are forced to cut their losses. 

If you unfortunately find yourself in the latter circumstance, one of the first things you should do is review your current contract, such as your commercial lease or supplier agreements, to determine if you are able to terminate them without huge financial repercussions. The following principles can help guide a critical analysis of your contractual obligations:

1.  The Contract Itself

Does your contract contain provisions for an extension of time? Or contingencies for the happening of certain events? Or limits on liability in the event of a breach? 

When interpreting a contract, Virginia law generally looks at the plain language of the agreement without considering other factors or evidence.[i] Thus, a critical review of the contract as a whole is important when assessing a business’ liability in any circumstance.

2.  Outside Influences

Regardless of the agreement’s language, you likely did not contract for unprecedented and unforeseeable eventualities (like the current health crisis). Nonetheless, a breach of contract may be excused if performance is rendered impossible by various outside influences, including what are known as “acts of god” and “acts of law.”[ii] 

a. Acts of God

The term “act of god” (or “force majeure”) comprehends “all misfortunes and accidents arising from inevitable necessity which human prudence could not foresee or prevent.”[iii]

These unforeseen events generally render contract performance impossible and excuse the resulting breach.

Under Virginia law, the COVID-19 pandemic would most likely qualify as such an event.[iv]

b. Acts of Law

Like acts of god, acts of law (such as a statute, court order, or executive order) may also excuse a breach of contract.

In such circumstances, contractual acts may be rendered impossible to perform by a subsequent enactment of law before the deadline for performance. Such change in circumstances relieves parties from their contractual liabilities.[v]

Here in Virginia, the executive orders issued by Governor Northam have curtailed business operations and prohibited certain conduct.[vi] As such, these executive orders (and any subsequent executive orders) could likely excuse contractual performance and limit liability, but only if they make performance truly impossible.

The COVID-19 pandemic is an evolving situation, and the resulting legal ramifications will likely take years to resolve.  Seek advice of counsel to assess your contractual liability. 

Jessica Clark is a Pender & Coward attorney focusing her practice on litigation, corporate and real estate law.

[i] Wilson v. Holyfield, 227 Va. 184, 187, 313 S.E.2d 396, 398 (1984) (“It is the function of the court to construe the contract made by the parties, not to make a contract for them. The question for the court is what did the parties agree to as evidenced by their contract. The guiding light in the construction of a contract is the intention of the parties as expressed by them in the words they have used, and courts are bound to say that the parties intended what the written instrument plainly declares.” (quoting Meade v. Wallen, 226 Va. 465, 467, 311 S.E.2d 103, 104 (1984)).

[ii] Caldwell v. Commonwealth, 55 Va. 698, 703 (1858).

[iii] Sanders v. Coleman, 97 Va. 690, 694, 34 S.E. 621, 622 (1899).

[iv] Id. (citing Story on Bailments, secs. 25, 511; Fish v. Chapman, 2 Ga. 349; Gleeson v. Va. M. R. R. Co., 140 U.S. 435).

[v] Caldwell, 55 Va. at 701 n.+.

[vi] Full text versions of the Governor’s executive orders are accessible at https://www.governor.virginia.gov/executive-actions/.