Best in Law: Contracts During the COVID-19 Pandemic
BB&K Attorney Todd Gee Shares Key Actions During a Pandemic in the Southern California Newspaper Group
By Todd Gee
The COVID-19 outbreak is a striking example of how something unexpected can upend a wide variety of industries in an extremely short amount of time.
When the unexpected strikes, communication is key. While a cliché, this adage is true in both personal and business relationships.
When you sign the dotted line on a commercial lease, loan agreement, manufacturing contract or any other business contract, both you and the other party have reached an understanding and fully expect the other to do what they promised.
Sadly, despite the parties’ signing-day optimism, you may not get the benefit of the bargain signed under the contract.
Ignoring bad faith, most failures to perform fall into one of two categories: foreseeable failures and unforeseeable failures.
Most parties are very good at spotting foreseeable failures, such as late payments, delivering a poor-quality product or failing to fix things in a timely manner. Much of the contract drafting and negotiation process will focus on dealing with the most likely failures and coming up with ways to protect your interests in the event of such failure.
Effective contracts attempt to anticipate unlikely scenarios that could prevent a party from performing its obligations. For example, almost every commercial lease has language specifying what will happen if a government entity decides to take all or a portion of the property being leased or if the property is partially or completely destroyed.
Similarly, many contracts have “force majeure” clauses that may excuse a party’s failure to perform if the failure was caused by an unforeseen event, such as a natural disaster or pandemic.
Effective contracts anticipate what happens when one party, for whatever reason, fails to perform, specify consequences for such failures, and create a framework for dealing with them.
No matter how well-drafted a contract is, it is impossible to anticipate every issue that might arise or every external circumstance that could make performance difficult or impossible.
In times of external shock, parties seek advice from attorneys regarding their rights and potential exposure under their contracts, and similarly, contact their insurance brokers to find out if their insurance policy covers the unexpected losses. While these steps are highly recommended and essential, effective communication with the other contract parties can preserve relationships and will likely lead to better cooperation from lenders, landlords, creditors and vendors.
If your performance is going to be hindered by an improbable or unexpected event, your first step, after consultation with your attorney, should be providing up-front, open and honest communication with the other contract parties. Parties that are blindsided are more likely to take an adversarial posture and will be less inclined to be flexible. Delayed communication, half-truths, rosy projections or complete inaction will likely lead to conflict, defaults and litigation and will jeopardize your future relationship with your contract partners.
During a crisis, the other parties are likely facing the same pressures you are. An open dialog can help everyone create a solution specifically tailored to the current situation, which may not have been foreseeable when you signed the contract.
Through open communication, the parties can amend their contract to allow for rent abatement, revised production schedules, delayed payments, etc., which can help both businesses survive through the crisis. This approach preserves the relationship and will allow the parties to resume normal operations and reap the full benefits of their contract after the crisis abates.
This article first appeared in The Press-Enterprise and other Southern California Newspaper Group publications online on May 13, 2020. Republished with permission.