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    To Breach or Not to Breach: Contract Performance During the Pandemic

    Byron Acosta
    By Byron Acosta

    Aside from the health and social toll that COVID-19 has wreaked on the global community, the Pandemic has upended the way modern business is conducted. Although the internet has been around for several decades, COVID-19 shattered and perhaps permanently altered the way commerce is conducted. Some companies were forced to transition entirely online to stay afloat. The pandemic also profoundly changed the nature of work. Before COVID-19, most employees were required to work in an office five days a week physically. Now, many companies have adopted a remote work model, while others have implemented a hybrid approach.

    For companies that could not transition to an online model, COVID-19 was a death sentence that wiped out almost all of their revenues since they depended on face-to-face interactions. Moreover, some companies could not transition to an online model because contracts bound them with suppliers and contractors based on an in-person customer business model.

    Business leaders were faced with a dilemma. One option was to honor their existing contracts and try to stay afloat long enough to allow the vaccines to return the world to normal. The other option was to breach their agreements and reinvent their way of doing business. One such company which decided on the latter option was Walt Disney. Apart from their well-known theme parks, Disney is a leader in the movie business. Their catalog of movies ranges from their beloved cartoon characters to adult films through its Marvel Studios.

    On July 29, 2021, Disney was sued by actress Scarlett Johansson for breach of contract regarding the recently released movie Black Widow. In the lawsuit, Johansson claims that the film’s simultaneous release on Disney+ and theaters caused her financial damage. Her contract with Disney’s Marvel Entertainment guaranteed an exclusive theatrical release, and her salary was tied mainly to performance at the box office. Additionally, Johansson’s lawyers allege that Disney intentionally induced Marvel’s breach of the agreement without justification.

    Disney’s defense is that it was a business decision, given the prolonged effects of COVID-19. Disney also claims that the online-release of Black Widow has improved her ability to earn additional compensation on top of the $20 million she has received to date. However, Johansson’s lawyers claim that the decision to release the movie online is projected to cost Johansson more than $50 million.

    The ruling in this case will be a bellwether for the entertainment industry. Johansson’s lawyers state that Disney has a legal obligation to honor its contracts despite COVID-19 or any business justification. Although details of Johansson’s contract with Disney have not been made public, the results of the case will depend in part on whether there was a force majeure clause that excuses performance. In addition, some media analysts suspect that COVID-19 accelerated Disney’s pre-COVID-19 plans to stream its movie content online. In other words, the company had plans in place long before the Pandemic to stream its films, and the decision to release Black Widow online was a strategic one to boost subscribers to its Disney+ product.

    The contract dispute between Johansson and Walt Disney is a high-profile example of the thousands of businesses in America who are faced with a similar situation. Theaters, opera houses, stadiums, sports leagues, restaurants, and many other companies had contracts based on in-person interaction. The question for the courts is whether those companies were justified in breaching their agreements by implementing an online model or whether they should honor their contracts despite the costs?

    In the case of Johansson and Disney, I suspect that absent a force majeure clause, the courts are likely to find the company liable for damages to Johansson. Other companies such as AT&T’s Warner Media chose to renegotiate many of its talent contracts that were tied to box-office performance—just like Johansson’s contract. Warner Media paid over $200 million as part of the amended contracts. Walt Disney’s Marvel Entertainment could have similarly renegotiated its talent contract to honor its obligations.

    Contract law is not only the glue that holds our society together and but also the grease of modern commerce. Courts should be loathed to allow parties to unilaterally disregard their contractual obligations, especially when there are alternatives to breaching. Notwithstanding the pandemic, parties should exhaust all other options before breaching their contracts. In the case of Disney, one alternative was to renegotiate their contracts instead of unilaterally breaching for a commercially expedient reason.

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