Many businesses have suffered financial strain in the wake of COVID-19. As a result, contracts that were made before the pandemic may be difficult or even impossible to fulfill.
This makes things difficult for both sides of a contract. If you can’t fulfill your contracts, you may become embroiled in litigation and end up further in debt. If another company breaches its contract with you, you also stand to suffer financial losses.
You may even be unable to fulfill your own contracts with others.
If you are concerned about the effects of a contract breach on your business, you should consider speaking with an experienced commercial litigation attorney to advise you of your options.
What Is Breach of Contract?
A breach of contract occurs when a party to a contract fails to fulfill one of their contractual obligations.
When this occurs, the other party can obtain a remedy for the breach. Possible remedies may include:
- Compelling the breaching party to perform (specific performance),
- Rescission of the contract,
- Reformation of the contract,
- Monetary damages, or
- Liquidated damages (a set amount of damages stated in the contract).
The types of remedies available may vary depending on the seriousness of the breach and the type of contract.
What Is Anticipatory Repudiation?
Generally, a breach cannot occur until the time for performance has passed. However, a breach of contract may be recognized sooner in the case of anticipatory repudiation.
Anticipatory repudiation occurs when a party either
- Expressly declares their intention not to perform; or
- Does something that suggests their inability to perform.
For example, let’s say you installed new appliances for a restaurant that was remodeling their kitchen. In return, they promised to pay you in installments. However, they have had fewer customers since the pandemic began.
Additionally, you learn that they have not been making payments to contractors that worked on the project. This may constitute an anticipatory repudiation, since it appears the business may not have the funds to pay you.
What Can You Do in Case of Anticipatory Repudiation?
There are several actions you should consider if you believe someone you have contracted with will not be able to fulfill their obligations.
Ask for Assurances
The Uniform Commercial Code, as adopted in Michigan, allows you to demand assurance of the other party’s ability to perform if you have reason to believe they may be unable to perform their obligations under the contract.
Your demand should be in writing, and the other party has 30 days to respond. You may be able to suspend your own performance while waiting to receive assurances.
For example, imagine you still had more appliances to deliver when you received information suggesting the customer could not pay for them. After you send your demand, you could wait to deliver the remaining appliances until you receive adequate assurances.
Try to Renegotiate the Contract
In the unprecedented circumstances created by the COVID-19 pandemic, it is to be expected that many people may find themselves unable to fulfill contract obligations.
Litigation can be an expensive option. Further, you may struggle to collect on a judgment if the other party is insolvent.
Thus, if it appears that someone with whom you have a contract will be unable to perform, you may consider renegotiating the terms of the contract rather than acting hastily to enforce your rights. For example, you may consider extending the time for the other person to pay or perform their obligations.
Mitigate Your Losses
When a breach of contract occurs, the non-breaching party must generally take steps to mitigate their losses. If you fail to mitigate, you may not be able to recover your full damages.
For example, imagine you had contracted to purchase fabric from a supplier to make T-shirts. Without the fabric, you will be unable to fulfill your T-shirt orders. There is another fabric supplier that will sell you the fabric for a higher price. This will decrease your profit margin, but you will still make a profit.
If you refuse to buy the other available fabric, you cannot then try to hold the original fabric supplier accountable for the entire value of your lost profits. They will be liable only for the difference between the contract price and the cost of the replacement product you could have purchased.
File a Lawsuit
If it becomes clear that the other party has no intention of fulfilling their obligations and won’t negotiate with you, it may be time to file a lawsuit.
If you have not already done so, you should consult an attorney before filing a claim in court. They can advise you on your possible causes of action and the defense you should anticipate.
Defenses in the Time of COVID-19
There may be a number of defenses that may excuse an anticipatory breach. If coronavirus contributed to your breach, the following defenses may be particularly applicable.
A force majeure—also known as an “act of God”—is an unforeseeable circumstance that prevents someone from fulfilling a contract. Many contracts contain force majeure clauses that excuse performance when performance is out of the contracting party’s control.
For example, if a restaurant had agreed to provide catering services but was then forced to shut down by a government-mandated closure, its failure to perform may be excused under a force majeure clause. Whether an event qualifies as a force majeure depends on the specific provisions of your contract.
Impossibility or Impracticability
Even in the absence of a specific force majeure clause, impossibility or impracticability may be a defense to a breach of contract claim. If circumstances beyond a party’s control make it either impossible to perform or so costly or difficult to perform that performance is impracticable, the law may excuse a breach.
Frustration of Purpose
Frustration of purpose occurs when it is technically possible for both parties to perform, but circumstances outside the parties’ control make the performance worthless.
Using the catering example above, let’s say the restaurant was not shut down but the government limited gatherings to no more than 10 people. The restaurant may still be able to deliver food for a large event. However, the government mandate will prevent the event from occurring. In this case, the person who ordered catering may be able to cancel the contract because the government mandate frustrated the purpose for which they made the contract.
Contact a Commercial Litigation Attorney
If you need to hold someone accountable for a breach of contract or if you are concerned about being unable to fulfill your contractual obligations, The Miller Law Firm can help. We have 25 years of experience litigating all types of commercial disputes. We can advise you of your rights, obligations, and defenses. Schedule an initial consultation with one of our knowledgeable business attorneys by calling us 248-843-0347 or contacting us online.