Contracting a Legal Dispute

UVA Law’s Cathy Hwang, Penn Law’s David Hoffman Explore Broken Deals During Pandemics
Cathy Hwang

Professor Cathy Hwang’s research centers on business law, including corporate contracts, mergers and acquisitions, and corporate governance. Photo courtesy of University of Utah S.J. Quinney College of Law

July 7, 2020

The COVID-19 pandemic has canceled events ranging from weddings and concerts to sporting events and conferences — and the courts are already congested with lawsuits to sort out the mess. These disruptions are demonstrating the shortcomings of contract law during a disaster in which broken deals were necessary to protect public health, two professors argue in a new paper.

Incoming University of Virginia School of Law professor Cathy Hwang and Professor David Hoffman of the University of Pennsylvania Carey Law School explore the issue in “The Social Cost of Contract,” and argue that renegotiation, rather than timely and expensive litigation, is the best course of action to maintain relationships.

Hwang, who joins the faculty full-time in August, teaches corporations, mergers and acquisitions, and deals. Her research centers on business law, including corporate contracts, mergers and acquisitions, and corporate governance. Two of her articles were voted among the top 10 corporate and securities law articles of the year, and one of her articles was selected for the Stanford/Yale/Harvard Junior Faculty Forum.

Hoffman and Hwang talked to UVA Law about their paper, how pandemics affect contracts and what parties ought to do if their contractual obligations are disrupted.

What inspired this paper?

During the Great Pause of March and April 2020, it became obvious that not performing certain contracts had become necessary to stop the virus. Both of us walked away from booked conferences and travel, we knew of friends whose weddings were postponed, and we observed even billion-dollar deals put off to avoid contagion. Immediately we wondered: How did jurists of the past think about the relationship between public health and contract?

What does the law say about pandemics and contracts?

Shockingly little. One of the only ways that parties can get out of performing contracts is if there’s some major unexpected event that counts as a “force majeure” — an unforeseeable circumstance that prevents someone from fulfilling a contract. But there’s some debate as to whether pandemics, which are arguably quite foreseeable (there have been a bunch in the last century!), count as unexpected. Other than that, our courts generally enforce contracts as written — and that predictable enforcement is thought of as a feature, not a bug, of American law.

But what happens if performing a contract would have hugely negative consequences for society? We’re thinking about things like weddings and conferences — organizers pay nonrefundable deposits and don’t want to lose them by not holding the event, but these events have become super-spreader events. In those cases, making parties perform the contracts isn’t such a great idea — and courts have, a few times, excused performance on these public health grounds.

What’s a historical example of a contract being excused?

We really like a case from 1916, where one Walter Hanford sued the Connecticut Fair Association for breach of contract after the association canceled a baby pageant (yes, a real thing!) because of an outbreak of polio in New York. The defendant’s obligation to pay was absolute and unqualified. However, a court refused to award damages or force the event to go on, citing threats to public health.

There is no general public health exception to contract enforcement — but the court found one in Hanford and a few other cases like it. Cases considering public health distortions of ordinary contractual doctrine have resulted from nearly every epidemic of the last two centuries.

Explain why you say in your paper that the public can help govern contracts.

Hanford and other cases excusing, reinterpreting and reforming performance obligations on public policy grounds show how the public’s interest interacts with private contracting. On a daily basis, private parties enter into contracts — to use a website, to lease an apartment, to host a family reunion or to merge two companies into one. And while seats at the contract-negotiation table are primarily occupied by the contracting parties themselves, one place is always implicitly reserved for another party: the public.

The public has three big opportunities to inject itself into private contracts: It can say what subject matter can and can’t be contracted, it can use regulation to change the substance of contracts, and it can choose not to enforce contracts at the litigation phase. At each phase, the public can also draw a line in the sand and say that the contract’s social costs are too high, so they refuse to allow that kind of contract, or they want to regulate it, or they choose not to enforce it if it’s litigated.

What should parties under contract do if they’re disrupted by the pandemic?

We’re big fans of collegial renegotiation. Sure, you can wave a contract in someone’s face and demand that they pay you for their breach. But post-pandemic, courts will get clogged with this kind of litigation, and your chances of having a judge or jury read your contract carefully, think about the law, apply the facts and award you what you deserve is pretty slim. Instead, we expect to see these contract-breach cases aggregated into mass litigations or subject to arbitration, which means you’re going to get a pretty unsatisfying settlement (and a lot of heartache and expense, too). A better option is to see if you can extend the contract, delay performance, split the losses — whatever you can to stay out of court and maintain a good relationship with your counterparty.

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