The Effect of Covid-19 on Business Contracts

By: Arend J. Abel, Attorney

With much of the nation shut down during the Covid-19 pandemic, many business contracts may not be performed.  One of the questions that arises from that circumstance is whether non-performance will be considered a breach of contract, subjecting the non-performing party to an action for damages.  There are three areas to consider in analyzing that question:  1) Force Majeure; 2) Impossibilitiy; and 3) Impracticability.  Impracticability is confined to contracts for the sale of goods governed by the Uniform Commercial Code

Force Majeure

Force Majeure, a French term meaning “superior force,” is a doctrine that excuses contractual performance made impossible by events listed in a contractual force majeure clause.  As the Indiana Court of Appeals has observed “the scope and effect of a force majeure clause depends on the specific contract language, and not on any traditional definition of the term. Specialty Foods of Indiana, Inc. v. City of South Bend, 997 N.E.2d 23, 27 (Ind. Ct. App. 2013).  A typical force majeure clause may look something like the following:

If a party cannot perform the obligations of this agreement due to an act of God, legal prohibition, fire, flood, natural disasters, military operations, or any other circumstance not within the control of the party, then the party is excused from performing such obligations.

The key question to ask in considering whether a force majeure clause excused a party’s performance is whether the event causing the non-performance is one of the events listed in the clause.  If the language does not specifically include diseases or epidemics, a court may or may not find that general language describing “other circumstances not within the control of the party” covers the event.  The Court of Appeals decision in Specialty Foods suggests that the particular clause set out above would cover such an event.  However, even slight changes in language can affect the result.  For example, a clause that excuse a party from performing for “reasons outside the party’s control such as an act of God, legal prohibition, fire, flood, natural disasters or military operations” might not cover CoVid-19 because the “such as” language might be interpreted to require the unlisted events to be similar in kind to those listed.  See Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902, 519 N.E.2d 295, 296 n.* (1987) (language that “other similar causes beyond the control of such party” did not cover an inability to perform due to an inability to obtain insurance coverage).

Impossibility

Under Indiana law, as well as the law of most States, impossibility of performance excuses contractual performance, even in the absence of a force majeure clause.  Wagler v. West Boggs Sewer District, 980 N.E.2d 363, 378 (Ind. Ct. App. 2012).  However, the party claiming the defense must  show that performance is “not merely difficult or relatively impossible, but absolutely impossible, owing to the act of God, the act of the law, or the loss or destruction of the subject-matter of the contract.” Id. (quoting Ross Clinic, Inc. v. Tabion, 419 N.E.2d 219, 223 (Ind.Ct.App.1981), which in turn quoted Krause v. Bd. of Trustees of Sch. Town of Crothersville, 162 Ind. 278, 283–284, 70 N.E. 264, 265 (1904)).

This may be difficult to meet in the case of Covid-19, though perhaps a business ordered to close by the authorities could meet the requirements, depending on the specific contract involved.

The Indiana Court of Appeals has considered whether an epidemic excuses contractual performance on two occasions.  Gregg School Township v. Hinshaw, 76 Ind. App. 503, 132 N.E. 586, 587 (1921); Gear v. Gray, 10 Ind. App. 428, 37 N.E. 1059 (1894).  In Gregg, the Court held that the fact that a school was ordered closed due to the 1918 flu pandemic meant that the School board did not have to pay teachers during the time the school was closed.  In Gear, the Court reached the opposite conclusion when a school was closed due to a local diptheria epidemic.  Explaining the different results, the Court in Gregg noted that in Gear, the local health authorities who ordered the school closed did not have express statutory authority to close the schools.  In Gregg, the Court noted, there was such authority, and the contract had to be read as incorporating such authority, which rendered performance of the contract impossible.

It is unclear how Gregg will affect contracts of businesses that have been shut down in the latest pandemic.  If the contract is one that literally cannot be performed when the business is shut down (such as a contract for an entertainer to appear at a venue), then most likely a court would excuse performance on grounds of impossibility.  However, contracts by which a business purchases goods and services may be technically possible to perform, even if pointless.  Courts may hold that performance is not excused in such cases.

Impracticability

Where contracts are for the sale of goods, the impracticability provisions of the Uniform Commercial Code could come into play.  Section 2-615(a) of the U.C.C. provides:

Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

Significantly, the provision excuses a failure to deliver goods by a seller but offers no relief to buyers.  In addition, to be excused from performance, the seller must comply with paragraphs (b) and (c) of the statute.  If the situation only partially affects the seller’s ability to deliver goods, paragraph (b) requires the seller to allocate production and deliveries among customers in a manner that is “fair and reasonable.”  Paragraph (c) requires the seller to provide the buyer with notice that there will be a non-delivery or delay, and if an allocation is required under paragraph (b) what the buyer’s allocation will be.

Impracticability is a lesser standard than impossibility, so sellers may have the ability to avoid contracts that become burdensome to perform, though not strictly impossible.

Regardless of whether Force Majeure, impossibility, or impracticability is invoked, the result will depend on particular facts and circumstances affecting contract performance.  The issues will also likely depend on contractual language that covers, or can be read to cover, the specific events in question. I have represented businesses in a variety of litigation for over 30 years. If you are in a contract dispute as a result of this pandemic, contact me to discuss how I can help your business and protect your rights.

Protecting Confidential Business Information

By: Arend J. Abel, Attorney

Sometimes businesses face a situation where an employee has departed and taken key information that can be used to hurt the business competitively.  This article focusses on steps a business can take to minimize that risk, and if information is nevertheless stolen, to seek redress under the Uniform Trade Secrets Act.  The Act has been adopted in Indiana and most other States.

Identify the Information to be Protected

The first step a business should take is identifying the specific information to be protected.  Customer lists may be some of the most valuable information a business has, and their theft and use by competing businesses may cause severe harm.  Other information, including formulas, business processes and technology, can also be valuable trade secrets.  A trade secret can be any information that derives independent economic value from not being generally known and not being readily ascertainable by other parties through proper means, i.e., means other than stealing the information from the business.

Take Reasonable Steps to Maintain Secrecy

Information does not qualify as a trade secret unless the business has made reasonable efforts to keep the information secret.  These efforts can and should include physical and electronic security measures.  The business should keep paper information in locked offices and filing cabinets.  Electronic information should be protected through the use of computer security that limits access to the information to only those employees who need to know the information to do their jobs.  In some cases, the business should require employees with access to confidential information to use only company-provided computers, phones, and portable devices to conduct company business and store company information.

A business should also maintain the secrecy of its confidential information by requiring employees with access to the information to sign non-disclosure agreements.  The agreements should list the types of information the employee is barred from disclosing.

Non-competition agreements are also an important tool to maintain the secrecy of confidential information.  However, non-competition agreements must be reasonable in scope.  This means that the geographic area in which the employee is barred from competing must be well defined , and no broader than necessary to protect the employer’s legitimate interests.  The agreement must also be limited in time, barring the employee from competing for only as long as necessary.  Finally, the agreement must be limited in terms of the activities prohibited.  Typically, agreements should prohibit the employee only from working for a competing business in the same or a similar capacity as the employee worked for the business with which the employee signed the agreement.

Enforcing Restrictions

Sometimes, despite the business’s best efforts, an employee may steal confidential information and use it to compete.  In such cases, the only recourse may be litigation against the employee.  A business might obtain a court order requiring the employee to stop using the information and return it.  If there is a non-competition agreement, a court may prohibit the employee from competing in violation of the agreement’s time, geographic and activity limitations.  If the business has been harmed, damages may be available.

To protect confidential business information, a business owner should consult with an attorney experienced in such matters, including litigation.  Cohen & Malad, LLP’s business and litigation attorneys can assist with this process.

Will Your Non-Compete or Non-Solicitation Agreement Stand Up in Court?

by: Mike McBride, Attorney

Business owners who draft and utilize non-compete and non-solicitation agreements without the advice of an attorney could pay a steep price:  the business might not wind up with any enforceable competition restrictions.  Overly broad non-compete and non-solicitation agreements have a potential fate of being deemed unenforceable in their entirety, as shown by a recent Indiana Court of Appeals’ opinion rendering one business owner’s non-compete agreement completely unenforceable.  See Clark’s Sales and Service, Inc. v. Smith, 4 N.E.3d 772 (Ind. Ct. App. 2014).

Help! I Need Local Counsel!

Congratulations!  You landed a great case with a great client.  Unfortunately, the case is out of your jurisdiction.  Do you still take the case?  The answer is “yes” if you can find and hire effective local counsel.  I have been fortunate in my career to be hired as local counsel and to have needed to hire local counsel myself.  Based on my experience, here are a few hiring tips for those seeking local counsel:

Protecting Your Business with Non-Compete and Non-Solicitation Provisions

by: Arend J. Abel, Attorney
Business owners invest a great deal of time and money in developing customer relationships. That investment can be placed at risk when key employees who have been servicing customers leave to work elsewhere. The valuable relationships they have built can easily be leveraged to move customers to the competition unless the business owner take appropriate measures to protect the business.
Similarly, a person buying an existing business is investing money to acquire the customer lists and relationships as well as inventory and product. Buyers can be placing their investment at risk if they allow the seller to remain free to re-start the business and compete for the seller’s former customers.

What Creditors Don’t Know Can’t Help You: Indiana Court of Appeals Holds Ex Spouse Liable for Business Debt

Learn more about our Business Litigation practice and attorneys

In a published opinion, the Indiana Court of Appeals taught a costly lesson to the former spouse of a business owner, and it’s one everyone involved in a small business (and their creditors) should heed. By failing to notify his former spouse’s landlord that his partnership with her had dissolved, an ex-husband became liable for more than $28,000 for a lease extension his ex-wife signed after filing for divorce. Curves for Women Angola v. Flying Cat, LLC, No. 76A04-1206-PL-312 (Ind. Ct. App. Feb. 26, 2013).

The What, How and Why of Mediation

Learn more about our Business Litigation practice and attorneys
If you or your business is ever involved in a lawsuit, there’s a good chance your attorney will talk to you about mediating your case. You may even be required to mediate before your case can go to trial. This article will discuss private mediation, but some courts (such as U.S. District courts) conduct “settlement conferences” with a judge or magistrate, that follow a similar form and have similar objectives.