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Column: Protect your business from breach of contract claims during the pandemic

With Gov. Steve Sisolak ordering the closure of all nonessential businesses in Nevada, the coronavirus has upended business operations throughout our state. While necessary to protect the health of our community, these restrictions present serious legal concerns for local businesses. With no way to operate, business owners worry about how clients, customers and vendors may react to the news that can no longer satisfy their contracts, at least for the time being.

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Michael Rounds

If you were forced to close your doors or drastically alter your business offerings as a result of the mandate, and were subsequently unable to fulfill certain contractual obligations, can you be sued?

As business owners contemplate this, we wanted to offer an at-a-glance analysis of two legal defenses that may provide some reprieve.

You may have something called a “force majeure” clause in your contract that relieves you of your duty to fulfill your contractual obligations under certain circumstances (think: a natural disaster). Once the force majeure event occurs, each party can walk away from the contract with no penalty. But what happens if you didn’t include a force majeure clause in your contract or didn’t identify a global pandemic or government-mandated closure in your force majeure clause? Would a court enforce your contract despite the fact that you’re unable to conduct business due to state-mandated closures?

It turns out the law may provide an escape hatch. If your business was forced to close, the doctrines of impossibility and illegality may help protect you from breach-of-contract suits.

Impossibility: When you can’t fulfill the contract

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Matt McKissick

The doctrine of impossibility frees you from your contractual obligations when an unforeseen event makes it impossible to satisfy the terms of the agreement. (It’s important to note the event must have been truly unforeseeable. If it’s something a party should have foreseen, but simply failed to consider, the impossibility defense won’t work.)

Determining impossibility is where we get into some room for interpretation. The boiled-down version is that satisfying the contract must actually be impossible—not just more costly or impracticable—to excuse you from your duties; however, courts will look at this on a case-by-case basis. If satisfying the contract would cause a party to suffer severe financial hardship, for example, that may rise to the level of impossibility, particularly in these times.

Because of this, determining whether the impossibility defense applies becomes a highly fact-intensive inquiry. Courts will consider a host of factors, including:

• The nature of the contract

• Industry standards

• The date it was signed (a contract executed in Nevada before March 20—when Sisolak announced the closure of nonessential businesses—is more likely to succeed under this theory than those signed after this date.)

Few business owners could have foreseen the spread of coronavirus and/or the state’s response to it. Plus, with no way to operate (or at least no way to operate at full capacity) because of the state mandate, it’s essentially impossible for certain businesses to fulfill their contractual obligations—making the defense of impossibility a solid option for business owners who are threatened with breach of contract claims.

Illegality: When fulfilling the contract means breaking the law

A second defense that could help protect your business from breach-of-contract claims is illegality. It’s a basic principle of contract law that parties can’t agree to something illegal and expect a court to enforce the agreement.

So what does that have to do with state-mandated closures during the coronavirus pandemic?

To ensure compliance with the state mandate requiring nonessential businesses to close, Clark County approved an ordinance making violations of the order a criminal misdemeanor. That means that attempting to conduct business during these closure periods may not only be impossible, it may be illegal.

Unlike impossibility, this defense relies less on the factual circumstances surrounding contract formation. In comparison, this is a much more straightforward inquiry into whether the terms of the contract would violate an applicable statute. Statutes are on the books to promote sound public policy, and going against that policy would be antithetical to one of the court’s primary objectives.

In Clark County, where violation of the local ordinance constitutes a crime, judges would be particularly receptive to the doctrine of illegality. Any contract terms that require you to remain open—both violating the ordinance and potentially furthering the spread of the deadly virus—would likely be void.

Mike Rounds is a shareholder and Matt McKissick is an associate with Brownstein Hyatt Farber Schreck.

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