Failure to meet a contract’s terms—to breach a contract—is a business reality. Businesses regularly face the prospect of someone breaching a contract or breaching a contract themselves. The legal and monetary consequences for breaching a contract can be significant, but they are not always certain.
There are legal realities when performance under a contract can be avoided, even permissibly. Those situations vary by agreement and state law. But as a general matter, the terms of most contracts and available legal defenses can present grounds when a contract’s terms will not be enforced. A general review of these situations can help show a few of the challenges that can accompany enforcement of a contract.
Contract Breaches and COVID-19
The general considerations in this article have gained an unusual importance with the unprecedented effects of COVID-19. The inability to meet contract terms is a new reality for many. It is essential to remember, however, that this current situation is temporary.
Soon, there will be demands for work and returns to complete contracted projects. Keep vigilant. Where current agreements exist, strictly comply with notice terms regarding delay and uncontrollable events. Seek to add modifying addenda that recognize specific COVID-19 impacts on projects and the contract terms. And, as the nation begins its state-by-state “reopening,” stay current with supply chain and labor limitations so you can be nimble and ready to target open work.
This will pass soon. Be ready for when it does.
Contract terms to watch
Contract terms often define situations where strict performance with the terms can be modified. These clauses set out situations where the parties have agreed, up front, that express performance can be adjusted to accommodate then-unknown situations. Common examples include supplier-delay or excused sub-tier clauses, both of which define situations where performance targets can be adjusted due to the conduct of others.
There are also regularly incorporated contract terms that can excuse performance. Many of these “boilerplate” terms are not given much review because the circumstances triggering the clauses are so rare. Common examples include impracticability of performance. These clauses have terms that define conditions or thresholds under which the parties agree neither will be responsible for performance of the contract. Others include the force majeure or “beyond control” clauses like those in AIA A201-2017. These clauses generally state that where performance becomes impossible due to the proverbial Act of God, the contract cannot be enforced.
Contractual clauses modifying or excusing performance often have a notice component that requires the party seeking modification or claiming an uncontrollable event to provide timely notification to the other party and provide a statement of justification. For example, AIA 201-2017 requires notice within 21 days of the event. Full compliance with these notice clauses can prove essential to preserving contractual-based arguments against breach.
In situations where a breach has occurred and the parties are considering litigation or claims to enforce the contract, it is important to recognize that there are defenses available that can excuse breaching conduct, regardless of an agreement’s written terms.
Defenses regarding the existence of the contract tend to focus on the circumstances that existed when the contract was formed. Common examples include a lack of exchange (consideration) for the contract, mutual mistake regarding the substance of the contract, or that one of the parties was clearly incapacitated, unduly influenced or under duress. In each of these scenarios, the party’s defense is that no contract was formed to support a breach, or that the enforceable scope of the contract is limited.
Where there is a contract, defenses still exist when clear terms are set. Many of these defenses arise within concepts of equity or fairness. In those situations, there is something about the conditions of performance or circumstance surrounding performance that would make it so unfair that courts or arbitrators are willing to excuse the required performance in some measure.
Common examples here include circumstances where requiring performance is clearly unconscionable. Perhaps one party had no choice but to enter into the agreement. Or if the terms for performance are so blatantly one-sided that enforcing the agreement would be offensive. In each of these scenarios the unfairness itself can present a legal defense to breaching conduct.
Another example includes the impossibility of performance—situations involving something that has occurred after the contract was entered into that could not have been anticipated by the parties. The event was of such a magnitude that performance of the contract is objectively impossible or completely impactable. This is similar to a force majeure event.
Good faith and fairness
When faced with a breach of contract, it is essential to remember that underlying most agreements is a duty to act in good faith and deal fairly with the other side. Reasonable efforts to meet all contract requirements can be essential to the pursuit of a legal claim based on the agreement. And, where circumstances are such that breach cannot be avoided, a showing of reasonable effort to work with the other side can help preserve defenses to the breach itself.