• Justin Hein

Contracts and Covid-19

Can coronavirus suspend or excuse performance of a contract? Maybe.

Given what has transpired in the past month--if not week, if not day--it is unsurprising that many parties to contracts are looking for ways out of commitments. A party to a contract may determine that, as a result of the coronavirus epidemic, an agreement or commitment it had previously made is no longer in its best interests. Either immediately or in the long-term future. Many will argue that performance of its contractual duties is now impossible, impractical or at least economically infeasible. Does their argument hold any water?

Applicable law, contractual provisions and the parties’ course of dealing before and since the outbreak, in some cases, make the answer far from clear. And when answer are not clear, parties tend to turn to the courts to obtain resolution.

With the possibility of litigating these sensitive issues on the horizon, it is useful to examine the legal principles that govern contract disputes stemming from the current health crisis.

What is Impossibility of Performance?

Contract law has long recognized and accommodated situations in which one party’s contractual performance is made impossible or impractical by intervening and unforeseeable events such as the outbreak of a war or a similar catastrophic event

Reflected in both the Uniform Commercial Code (governing sale of goods) as well as the Restatement (Second) of Contracts, the rule is generally referred to as the doctrine of impossibility of performance. Every state recognizes some form of the law of impossibility, either in the common law of contracts or by code.

California has codified the law as follows:

The want of performance of an obligation, or of an offer of performance, in whole or in part, or any delay therein, is excused by the following causes, to the extent to which they operate: (2) When it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.

(Cal. Civ. Code, § 1511.) Even if not entirely impossible to perform, if it is utterly impractical to perform, the same result obtains—performance of contractual duties may be excused.

The bar for proving impossibility is high and requires that the condition purportedly interfering with performance be entirely unforeseeable.

What is a Force Majeure Clause?

Force majeure (pronounced FORS mah-ZHUR) is a common, miscellaneous provision added near the end of most contracts. Sometimes it is referred to as a 'catch-all' provision or 'act of God' provision. It is used to excuse performance by one or both parties in the event of some kind of exemplary, unexpected event.

A force majeure event occurs when unforeseeable circumstances, such as natural catastrophes, prevent one party from fulfilling its contractual duties, absolving them from penalties.

Typical, force majeure event in contracts include:

  1. acts of God, such as severe acts of nature or weather events including floods, fires, earthquakes, hurricanes, or explosions;

  2. war, acts of terrorism, and epidemics;

  3. acts of governmental authorities such as expropriation, condemnation, and changes in laws and regulations;

  4. strikes and labor disputes; and

  5. certain accidents.

Determining whether a force majeure clause can be invoked is a fact intensive inquiry, as it depends on the specific language of a contract. Generally, force majeure clauses are interpreted narrowly.

Meaning--you guessed it--an unexpected emergency can only typically excuse contractual performance if it was only unexpected up to the point of being expressly written in the contract as excusing performance.

What is Frustration of Purpose?

If a contract does not have a force majeure clause, most courts excuse a breach of contract anyway if an unforeseeable event makes performance impracticable, by requiring a very high level of difficulty, extra expense, or completely defeat the intent of the agreement. This closely-related legal doctrine is frustration of purpose.

Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or circumstances [of the contract] indicate the contrary.

(Restatement (Second) of Contract 265.) This doctrine may be invoked where performance is not impossible but, due to the significant change in circumstances, a basic assumption in the parties’ agreement has not materialized.

What is Excusable Delay in Performance?

One, as of yet unresolved, issue in permitting any of these legal concepts or contractual provisions to hold is whether the underlying event is one that merely provides an excuse to delay performance as opposed to a complete termination of the contract. As we do not know how long the crisis will be or resulting remedial measures, we do not know for certain if performance is now rendered completely impossible, is completely frustrated, or warrants relief by way of force majeure. Some contracts based upon specific events taking place on specific dates may very well be checking these boxes off. In those cases, time either was explicitly of the essence or an agreement may have included such a timing provision.

But others remain undetermined. And as such, may not warrant the court providing complete relief, but rather conforming that the obligation exists to be provided at a later date.

Burden on the Party Seeking to Assert

Regardless of which party arrives first at the courthouse steps, the burden remains the same—the party seeking to avoid the contract through these legal principles and doctrines will bear the burden of proof.

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