Like many things in life, the answer to this is maybe. Depends on the facts. First, if both parties agree, of course you can. It takes two to tango, and it takes two to make or unmake a contract. Anything you can agree on, you can do. Second, your contract might already have a procedure for dealing with this, called a force majure clause. Those clauses will generally be enforced, and whatever the contract says will set forth the procedure of what happens next.
What if both parties don’t agree to cancel the contract?
Wisconsin does recognize the doctrine of “frustration of purpose.” However, it is not something for which you can easily qualify, the Wisconsin Court of Appeals has set out three relatively simple elements, but like many things, the devil is in the details.
(1) the party’s principal purposes in making the contract is frustrated; (2) without that party’s fault; (3) by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made.Sheppard, 328 Wis. 2d 533, ¶¶12-13
The rub is, it can’t just be that some part was frustrated, the principal purpose of the agreement must be prevented rendering the contract “meaningless” or “virtually worthless.” Further, it doesn’t apply if the risks could have been anticipated by the parties. The example given by the Wisconsin Court of Appeals was that someone was hired to do bridge and road work, but before they could do the work, someone else built the bridge. The contract was worthless, there was no work to be done. The company hired to do the road work did not have to perform any work, but likewise it was not entitled to be paid. Convenience Store Leasing & Mgmt. v. Annapurna Mktg., 388 Wis. 2d 353, 364–65.
My experience in business litigation cases is that judges and juries want to hear specifics. These cases are won and lost on the particular facts. What exactly about COVID-19 rendered the contract meaningless? What else could have been done? And, while not technically an element, I guarantee every jury is going to want to know what you did to try and fix it before you gave up. It is the difference between the law on paper, and the law in practice in front of a jury. A problem has occurred and the jury needs to know whose fault it is. If they think it is your fault, you will lose the case.
What should you do if you need to cancel a business contract?
- Try not to. Find a way to perform the work or work out how to do it in a slightly modified but acceptable way. I promise this will likely be the best and cheapest resolution.
- If you really cannot comply, document evidence of why you can’t. Contact a lawyer right away to help you establish why you cannot perform and your clear notice to the other party.
- Give as much notice as possible. This is a good idea from both a practical and a legal defense standpoint. The more time they have to find someone else, the less likely they are to sue you, and the better defense you have regarding their obligation to mitigate their damages.
Do I have to just wait to be sued?
No. If you believe that you fall into the small category of companies whose contract has truly had its contract rendered virtually worthless as a result of Covid-19 and the ensuing fallout, or if you have a force majeure clause in your agreement that protects you, you can file what is called a declaratory judgment action where you go to court and ask the court to decide that you were justified in cancelling your contract.
If you find you and your business in this situation, whether you have been sued, or you want to get clarity from the courts, feel free to call me on my direct line, 414-755-5020, or e-mail me at firstname.lastname@example.org and I can see if we can help you. We even charge flat fees for some business litigation cases.