Structuring Termination Clauses in Commercial Contracts: Force Majeure, Impossibility, Frustration of Purpose, Damages

Description

The global pandemic has destabilized all areas of commercial contracting and the supply chain. Counsel must examine default and termination provisions of ongoing and future agreements and how to calculate damages for those contracts. Force majeure provisions in commercial contracts are now under the microscope, although the clauses were most likely given little thought at the time of drafting.

If a contract does not include a force majeure clause, a party may raise the defense of impossibility or impracticality. Under the Restatement (Second) of Contracts 261, a party can discharge a contractual obligation when "performance is made impracticable without his fault by the occurrence ... or the non-occurrence of [an event] which was a basic assumption on which the contract was made." Experience from the pandemic may allow counsel to anticipate what is possible and practicable in ongoing and future agreements.

Many businesses, particularly if thinly capitalized, are experiencing cash flow challenges. Agreements frequently include provisions that a default and termination occurs when one party files bankruptcy. Parties should carefully weigh whether to exercise early stage insolvency-related termination rights if the counter-party experiences short-term cash flow problems. Entering contracts with new suppliers who are on healthier financial footing may prove more difficult, time-consuming, and costly.

The underlying economics of a fixed-price agreement made before the pandemic are fundamentally different now if change-in-law relief is not available and force majeure relief does not cover a party's COVID19-related losses and increased expenses. Parties may instead prefer to seek equitable relief to mitigate losses, such as extending the time for performance or orders of restitution.

Listen as our expert panel provides practical strategies for drafting and negotiating termination provisions of future commercial agreements to ensure clarity in issues of force majeure, the impossibility of performance, and damages to mitigate risks.