The overall economic damage of the COVID-19 pandemic continues to build. Restrictions on business activity and overall movement via safer at home directives have (i) constrained contract participants’ ability to perform or (ii) impacted the business decision of whether it is reasonable to perform. Those who were forced or otherwise elected to not uphold contractual obligations may try to invoke protection from economic damage claims under force majeure.
Many contracts have some form of a force majeure clause, which generally indicate that a party is excused from performance that is rendered impossible due to circumstances beyond its control. However, the specific contract language can vary, and may specifically include or exclude certain types of events/circumstances in determining whether abandoning contractual commitments is allowable. In the absence of contract language, general contract law may also provide relief based on impracticability or frustration of purpose.
Given the enormous number of contracts that were or will continue to be breached with ongoing pandemic conditions, parties will undoubtedly assert differing positions on whether or how this protection applies, and many will ultimately pursue litigation to recover compensatory damages. An assessment of litigation exposure or potential for recovery is critical to determining how to proceed. Even if a defendant believes their contractual protection is strong, the uncertain nature of litigation makes it ill-advised to not understand the potential exposure or allow a plaintiff’s calculation to go un-rebutted. The failure to offer a competing calculation often lands defendants in an all or nothing position, which is unnecessarily risky.
Damages for breach of contract claims are most often measured by the lost profits associated with the breach. In more extreme cases, the entire business value may be lost. Regardless of the damage measurement, the calculation must consider the altered conditions of the current environment and measure damages based on the profits that would have been realized but for the defendant’s performance breach, not those originally expected when the contract was entered. Plaintiff also has a duty to mitigate and any actual profits realized are a damage offset. In some cases, the defendant may be able to demonstrate that the altered economic conditions would not have provided incremental profitability to the plaintiff (or even resulted in greater loss) had performance occurred.
In order to prove or defend most claims for economic damages, one will need expert witness testimony. Involving an experienced damages expert early in the process can help with document requests and production, recovery/exposure assessment, and reasonable settlement negotiations.
Fulcrum Inquiry’s expert witnesses perform economic analysis of lost profits and other commercial damages and business valuation and provide expert witness testimony.