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We’re putting together a series of videos based on the concerns that we are hearing from our business clients so that we can disseminate some of that information out into the wider market, let people know what’s available to them, what we can do to help you out in managing some of these frankly very concerning issues that have been raised because of COVID-19 and coronavirus. And today in this video, I want to talk to you about disruption of business by non-performance of contracts.

Party of the Contract

Specifically, I want to deal with when you were a party of the contract, meaning you were one of the people that signed on the dotted lines. These are the types of contracts that you’re going to see where a supplier is supplying widgets for another company.

And because they’re no longer able to get the raw materials they need for their widgets, now maybe they can’t adhere to a supply requirements contract. They were supposed to deliver 20,000 of this item, and now they can’t. Or a venue that, because of the changes to the government restrictions, you can no longer have more than 10 people at the venue, or the venue may be totally nonessential and totally closed under a nonessential business designation.

In those situations, what do you do? You can’t do what you were supposed to do under these contracts, and that’s very concerning as a small business owner. How am I going to get my revenue, but also am I going to be sued? If I am requiring another company to perform for me, do something under a contract, and they’re telling me that they can’t perform for whatever reason, what are my remedies to do anything?

And unfortunately, I have to keep telling my clients, that’s not a clear answer, and it’s increasingly more dependent on the very contract that you have. And I want to give you a little bit of information about what you can look for and what kind of things you can expect, so that you can make a better decision about what your options are available to you and whether or not you should retain the services of an attorney to represent you.

And the answer is probably yes. And the reason why this comes into is this area of loss, particularly for small businesses, is increasingly dangerous, because we find that many of our small businesses no longer include the quote-unquote boilerplate language that you would see in a larger business contract.

They see that five-page contract, three pages of which covers a bunch of contingencies that nobody expects to ever occur, and they say, you know what, I want a simple contract. We do business on a handshake here in our business. And so we utilize a smaller contract or a simpler contract that maybe we got off Legal Zoom, or maybe we drafted ourselves. And nine times out of 10, that contract has been fine, but this is that 10th time. And that boilerplate language is extremely important in governing how these situations are handled and what kind of remedies are available to you.

And so for our small business clients, we have to increasingly tell them, we don’t know without looking at your contract what is available to you, what’s going to happen. And when that contract is silent about these terms, when that boilerplate language is not included, then it becomes an even more difficult question. Because now you’re going to look at the courts.

You’re going to look at what’s the state law. You’re going to look at the common law. And that is an extremely loaded question, because the common law is in the court, what the courts are going to do, is a jurisprudence that preexists America. This is an area of law that’s been built on itself one layer at a time dating all the way back to the 500 AD and the Magna Carta. This is way back, and while a lot of the original theories have been built upon and modernized, there’s a lot of very unintuitive things that still exist in that jurisprudence.

And it can change from state to state, and it may not even be governed by the state that you’re in, because there may be clauses in your contract that make your contract governed by the laws of the state of New York or Delaware or New Jersey or Florida, or any other number of states other than North Carolina, the state in which you reside. And so it’s very difficult for us to give clear and concise answers to our business clients about what they can do without really evaluating their individual contracts, their individual situations.

But I want to give you a little bit of information about the things that you’re going to look for and the things we look for, so that you have a better understanding of what kind of things may or may not be in your contract and what kind of things may have exposed you to legal liability, despite somebody’s non-performance or somebody else’s legal liability to you for their non-performance.

Clauses 

Now, we’re going to be looking for clauses like that deal with issues like impossibility, frustration of business purpose. These are two common law theories. Sometimes there’s contractual clauses that govern these. Oftentimes, these are absent out of the boilerplate, but these are theories dealing with first, impossibility. We cannot do what we were contracted to do, because it has become impossible because we’re a nonessential business and we can’t go to work, or frustration of purpose.

If you’re a venue and you can still be open, but you contracted with this venue to produce or to give you an event for 200 or 2000 people, and now they can’t have more than 10 people there, and they all have to stand six feet apart from each other, and they all have to wear masks, that defeats the purpose if you’re trying to put on a wedding or a Bar Mitzvah or some sort of event where you are expecting those 2000 people, and that’s going to be more of an under a frustration of business purpose.

And the existence of clauses that would govern this would explain to us what you’re going to do, and if not, there is a laundry list prudence, and it varies from state to state. And that’s going to depend, again, on your contract, but how to deal with these situations. Maybe it voids out the contract, maybe it rescinds the contract. Maybe it excuses some, but not all performance. Maybe it requires mitigation. There’s a lot that’s required on that. And so we encourage our business clients to contact us so that we can look into those, and that’s what you’re going to see a lot of this falling under.

Another clause that you’re going to see more commonly is a force majeure clause. Now, the structure of these clauses is going to be extremely important. Depending on how it’s worded, it may or may not exclude events like this, but a force majeure clause covers acts of God, floods, tornadoes, hurricanes, earthquakes, wars, famines, all sorts of things.

But depending on the way that language is written, and oftentimes this language is just copy-pasted or excluded altogether, it may or may not include this event. And we’re going to increasingly see more and more states and more and more courts really have to get into what that language means and whether or not this coronavirus event is going to be included under a force majeure clause.

Now beyond those clauses, which deal more with general liability, am I liable, is my non-performance excused, you’re also going to have to look at what are my remedies, what are my damages? What am I going to be liable for? Maybe they win, but they don’t win anything. The whole, yeah, they won the lawsuit, but they only got a dollar.

And then you’re going to have to look, and we’re going to look at things like, is there a substituted or specific performance requirements? Are there clauses that govern those sorts of things? Are there clauses for liquidated damages? Are there clauses for consequential damages, which are things like lost profit, lost businesses? Are there indemnification clauses dealing with third parties? And we’re going to put out another video dealing more with third party claims and what to do if you’re not a party to a contract and that non-performance in that other contract is impacting your business.

But it’s extremely important to understand that if you can’t perform under this contract, there may be other parties other than your contracting partner who may or may not have claims against you and may not try to bring claims against you, whether or not they’re successful. We always say you can sue anybody.

Whether or not you win is another question. But these are extremely important questions that a business owner needs to evaluate in how they’re going to operate their business in these times, because they need to understand what they’re going to be liable for, especially when you’re looking at things like how much money do I need to go look at in terms of creating liquidity, maybe under one of those SBA loan programs, under the CARES Act.

And so we are working increasingly with our small business clients to go through and do these deep contract reviews, particularly on their key contracts, so that they understand what kinds of reasons will excuse their performance.

If the other side is being excused performance, what that means for the disruption of their business, whether or not they have to mitigate those damages, whether or not they can go find somebody else that can get you more, or maybe you have to sit on your hands and your only viable solution is to bring arbitration. An arbitration clause might be in there that requires you to not be able to go to court to actually litigate this. You have to go into arbitration.

And so there’s a lot going on, a lot of moving parts, and I really, really, really, really encourage any business that’s looking at a contract and saying either I or my business partner or this party that I contracted with cannot perform under this contract and we’re expecting, or we’re concerned, that there’s going to be a legal liability, you really need to get a legal opinion there because there is so much going on and it changes, sometimes day to day, the coronavirus, the CARES Act, what was originally put forth, that took a week to push through.

But every single day, that legislation changed. It can change from state to state. Your contract might not even be governed by the state that your company resides in. Maybe there’s a clause in there that puts it in another state. And maybe you’re looking at North Carolina. There’s just so many moving parts to this.

What’s Missing is the Most Important Part

I cannot emphasize enough how important it is in order to understand the legal ramifications of these contracts in this time and understand what that boilerplate is, what it means, what’s missing. That’s the other big thing. What’s missing is the most important part. And it’s really, really important that you hire an attorney, hire somebody who understands this stuff, somebody like our firm here at Hopler, Wilms, & Hanna, to really go through that.

And you’ll be surprised, understanding what is available to you will really improve and oftentimes reduce the total cost, because you can head off this lawsuit at the pass. If you know what your legal liability potentially is, you can really get that negotiation going on the right foot. You can really talk to this partner and get something that’s going to work out in your benefit. Try and keep that business going and really work this through, oftentimes at a cost that’s significantly lower than waiting until you get sued or having to just fire from the hip with a lawsuit.

And we really, really encourage all of these small businesses that are looking at these contracts, are getting pressured by this non-performance, to retain, hire us, get that legal advice. You really need to understand the legal ramifications of what these contracts are and how COVID-19 may or may not excuse non-performance under those contracts.

My name is Clayton Jipping with Hopler, Wilms, & Hanna. And I hope that you found this informational, and I hope you continue to find the other videos that we put out informational. We’re trying to do the best that we can to help us, help our community, help our business clients, and help the small businesses that are out there that desperately need this information. So again, I wish you the best and wash your hands, keep with it. And I hope you and yours are safe.

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