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Legal and Financial Aspects of Breach of Contract Claims Resulting from COVID-19

The COVID-19 pandemic has impacted businesses around the world.

Businesses are seeing interruption in their supply chains and many contracts can no longer be performed, resulting in attorneys filing and/or defending breach of contract litigation actions. Collaboration between counsel and experienced damage experts is paramount to successfully understanding the potential liability and/or appropriate defenses for these matters.

Contract Terms and Common Law Defenses

Businesses should work with legal counsel to determine whether their contract addresses a party’s ability to excuse contractual nonperformance through either force majeure provisions or other mechanisms.[1] The force majeure clauses generally take two basic forms. The most general form, excuses performance under the contract due to any circumstance outside the party’s control. The second type of force majeure clause identifies specific events that trigger the clause. Examples of such events include acts of God, extreme weather events, war or riots, and/or terrorism. Force majeure clauses that expressly contemplate a pandemic as a force majeure event are rare.

If a contract does not contain a force majeure clause, parties seeking to excuse nonperformance may use the common law doctrines of impossibility or impracticability. These doctrines may excuse nonperformance where a party establishes that: 1) an unexpected intervening event occurred; 2) the parties’ agreement assumed such an event would not occur; and 3) the unexpected event made contractual performance impossible or impracticable. As an example, death and disability make service contracts impossible.

Lastly, some courts recognize a separate doctrine called “frustration of purpose”. Under this doctrine, performance can be excused when a supervening event changes the nature of a contract and makes one party’s performance worthless to the other.

Economic Damages

Companies contemplating asserting any of these defenses and/or asserting an economic damage claim from an alleged breach of contract should maintain and update their records concerning the factual circumstances and potential economic damages incurred. These documents will be key to creating a timeline of events needed to assert or defend a damage claim. Additionally, plaintiffs should gather relevant budgets, forecasts, and financial data from business segments and/or offices unaffected by the pandemic and/or other triggering events. Potential plaintiffs should also track costs as they would in the ordinary course of business. Documentation supporting costs such as invoices, contracts and/or leases should also be maintained. Additional documents that should be compiled include payroll records, tax returns and correspondence with suppliers and/or customers. Lastly, defendants in breach of contract cases should also request financial information gathered by the plaintiff as part of the discovery process, so that it can be analyzed by their expert.

Whether you are a business owner affected by these issues or an attorney representing these parties, we at Withum are here to help. Contact a member of Withum’s Forensic and Valuation Services Group.

Damage experts work with counsel in breach of contract matters by offering assistance on document requests and production, determining the most appropriate damages methodology under the circumstances of the case, assessing components of economic damages, and rendering an expert opinion of economic damages due to alleged actions.[2]

Financial experts on the defense side are often retained to refute economic damage claims in a breach of contract matter. This can entail questioning the methodology and/or assumptions used in arriving at the plaintiff’s economic damage computation. Financial experts also work with counsel to determine what steps the plaintiff took to mitigate damages and can quantify the effects of such mitigation. In addition, they can assess external factors apart from COVID-19 that may have impacted business operations.

In conclusion, parties should work with legal experts to review their contracts including whether their contract includes a force majeure provision and what it covers. On their part, counsel should look to damage experts for input on document production, costs incurred as a result of the triggering event, external factors that may have impacted operations, and mitigation is taken.

[1] This article is written by a forensic accountant and should not be used for legal advice.

[2] Establishment of liability and proximate causation is a matter for the Court, not financial experts.

Forensic and Valuation Services

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