As the COVID-19 pandemic has made it difficult for some parties to meet their obligations, many have begun to seek extensions of contractually imposed deadlines or other contractual modifications.
In response to these requests, contractual counterparties will want to offer soothing words to customers, suppliers, and others whom the pandemic has affected personally and professionally. A company representative may, for example, tell a worried counterparty, “We are extending credit to everyone; I am sure we’ll extend you credit, too.”
But while nice in theory, soothing words might be mistaken for promises that the speaker does not intend. And those promises might later form the basis of a legal claim.
For instance, we have seen general assurances to a contractual counterparty used later as the basis of a commercial fraud complaint.
Although state law typically bars fraud claims based on promises covered by a written contract, it typically allows fraud claims based on extra-contractual statements.
So while you may view an assuring statement as an offhanded comfort to a contractual counterparty, your counterparty may view the same statement as a promise on which you intended it to rely, and the counterparty may allege that any attempt to deviate from that statement is fraud.
Similarly, one party may claim that another’s assurances modified an existing contract by relieving the party from some of its prior obligations.
Although states ordinarily have laws (known as statutes of frauds) requiring that many types of commercial contracts and contractual modifications be in writing, the required writing need not be formal.
A single email might suffice. Indeed, in some states, a promise without consideration, signed by only one party, will overcome the statute of frauds and the typical requirement that contracts (and modifications) can be valid only if the promisor receives consideration in exchange for a promised action.
And while statutes of frauds vary by state, many have exceptions. For example, when a counterparty acts in reliance on the oral statement, some statutes of frauds will not bar courts from treating oral statements as contractual modifications.
We have also seen plaintiffs allege, with limited factual support, that a party made a promise to do something and that the plaintiff reasonably relied on that promise to his or her detriment.
In times like these, such cases might ultimately be difficult to prove, including because companies that uttered soothing words merely to assure their counterparties may have strong defenses that they never intended to defraud their counterparties or modify existing contracts.
But courts often find intent to be too thorny an issue to decide on a motion to dismiss, where it must accept the plaintiff’s version of the story as true. And as anyone who has litigated in the United States knows, a case that makes it to discovery can be expensive and creates settlement leverage. Soothing words may therefore result in costly litigation.
To protect against litigation based on soothing words to counterparties, stick to the following best practices:
- Limit discussions of contractual terms to writing.
- Keep in mind that your statements about the contractual terms, such as allowances for nonperformance and extensions of deadlines, can be viewed as modifying an existing contract or creating a standalone representation on which your counterparty may later claim reliance. So be precise about what you are and are not agreeing to.
- If you do discuss contractual terms with your counterparties orally, follow your discussions with an email or letter summarizing the discussion. Again, be precise about what was said and where the parties landed.
- If you wish to modify an existing contract, enter into a side agreement, or otherwise alter contractual obligations, consult an attorney to help with the negotiating and drafting the contract.
For more information about the legal implications of COVID-19, please visit our coronavirus alert hub.