In the midst of the coronavirus (COVID-19) pandemic, health authorities and federal, state, and local governments have issued proclamations, states of emergency, recommendations, and orders affecting the assembly and movement of people. With these actions, and likely more to follow, many companies have closed or curtailed business for the foreseeable future and cancelled or postponed events. Manufacturers and suppliers meanwhile struggle to meet demand for some products while the demand for other products has all but disappeared.
Today’s economy is built on written contracts, whereby parties reach a meeting of the minds and legally bind each other to perform certain acts in the future. Generally the failure to perform under a contract constitutes a breach, entitling the non-breaching party to damages. But when the truly extraordinary and unexpected happens, three concepts may offer relief: force majeure, impossibility, and frustration of purpose. While the courts in different states do not interpret these legal principles exactly the same, the intent here is to address the general concepts and their potential application as a result of the COVID-19 pandemic.
Force Majeure
Literally translated, force majeure means a “superior force” and a force majeure clause is “a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.” [1] A force majeure clause is one found in the contract, whether the product of negotiation or boilerplate, meaning language taken from an earlier agreement without much or any thought. An example of such a provision is as follows:
A party shall not be held liable for failure of or delay in performing its obligations under this Agreement if such failure or delay is the result of causes beyond its reasonable control, including but not limited to, an act of God, such as earthquake, hurricane, tornado, flooding, or other natural disaster, or in the case of war, action of foreign enemies, terrorist activities, labor dispute or strike, government sanction, blockage, embargo, or failure of electrical service.
A properly invoked force majeure provision relieves a party from performance under a contract when non-performance would otherwise constitute a breach. When a party’s invocation of a force majeure clause is challenged, with the other party claiming a breach of contract, the dispute may be resolved in litigation. Courts place the burden of establishing the conditions of force majeure on the party invoking the provision. While a court’s focus is the language of the force majeure clause, as it would be in any contractual dispute, a successful party must establish that: (1) the event that led to the non-performance was outside the party’s control; (2) the event was not specifically foreseeable; (3) the event was the sole cause of the failure to perform; and (4) the event could not have been avoided with the exercise of due care.
Impossibility/Impracticability or Frustration of Purpose
For contracts that do not have a force majeure clause, and in some instances even when they do, [2] a party may raise the defense of impossibility or impracticability. Courts may read into a contract the concept that the parties intended to require performance only if commercially practicable. The Restatement (Second) of Contracts § 261 notes that a contractual obligation can be discharged when “a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made.” Similar to force majeure, courts typically require the party to establish that: (1) a contingency has occurred; (2) the contingency made performance impracticable; and (3) the parties did not foresee the contingency when the contract was made. [3] Due to the similarities between the defense and force majeure, some courts have merged the analysis and address them together. [4]
Uniform Commercial Code § 2-615—which applies to, among other things, contracts related to the sales and leasing of goods—provides a similar defense “if performance as agreed has been made impracticable by the occurrence of a contingency . . . or by compliance in good faith with any applicable foreign or domestic governmental regulation.”
A similar but slightly different concept bears mentioning as well, frustration of purpose. The doctrine allows the discharge of a contractual duty when the “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.” [5] While courts recognize this concept, it has not been as widely developed as force majeure or impossibility/impracticability.
Application of Contractual Principles to COVID-19 Pandemic
A party’s obligation to perform under the terms of a contract will greatly depend on the language of the agreement and the underlying circumstances. The COVID-19 pandemic satisfies some, but not necessarily all, of the conditions necessary to relieve a party of performance.
For contracts entered before the pandemic reached the United States, the pandemic will likely be found to be a major external event, outside the control of the parties, and not foreseeable at the time of the contract. But whether the pandemic made a particular party’s performance practically impossible could require a fact based analysis that considers the terms of the contract.
Contracts entered in the midst of the COVID-19 pandemic are more likely to be enforced, as the party seeking relief could be deemed to have been aware of the challenges of performance.
Some have predicted that the pandemic will trigger a recession in the United States. Relying on Comment B to § 261, courts have held that “mere market shifts or financial inability do not usually effect discharge.” [6] So non-performance due to the immediate effects of the pandemic may be excused, but non-performance as a result of a virus-induced recession may not. But some courts, consistent with the Restatement (First) of Contracts § 454, interpret impossibility/impracticably more broadly as “not only strict impossibility but impracticability because of extreme and unreasonable . . . expense[.]” Thus, post-pandemic litigation could focus on whether the economy makes performance “extreme and unreasonable.”
When force majeure and impossibility do not provide relief, a party may consider the defense of frustration of purpose. For example, assume a company has contracted to reserve a space for a celebration after an award ceremony scheduled for August 2020. The award ceremony itself is then canceled by an unrelated entity as a result of lingering concerns over the pandemic. While the event may be possible by August 2020, the organizer of the after-party may be able to invoke the defense of frustration of purpose because it was the principal purpose of the event to celebrate the awards ceremony.
Additional Considerations
A party considering whether to invoke force majeure or impossibility in order to excuse performance should consider whether a court would deem modified or delayed performance appropriate, rather than terminating the agreement. While some force majeure provisions provide clear guidance many contracts present a quandary—to take the position that the contract is terminated due to the impossibility, or to attempt to perform to a lesser extent or at a later time. Restatement (First) of Contracts § 462 states that a temporary impossibility “suspends the duty of the promisor to render the performance promised only while the impossibility exists.” Restatement (First) of Contracts § 463 states that a partial impossibility affects the “existence of duty . . . only as to that part; and if performance of the whole contract is possible with only an unsubstantial variation, the promisor is under a duty to render performance with that variation.”
For example, a contract entered in November 2019 requiring a company to supply 1,000 cases of medical facemasks by April 1, 2020, may now be impossible to perform. The viability of the defense of impracticality or force majeure may be different, however, if the November 2019 contract required facemasks to be delivered over the next three years, or if, while the April 1 deadline could not be met, a May 1 delivery was feasible.
Notice Requirement
Whether under force majeure, impracticability, or frustration of purpose, a party not willing or able to perform under a contract must provide timely notice to the other party. The notice period and form of notice may be specified in the agreement, and otherwise should be “reasonable.” A party considering whether to invoke force majeure, impracticability, or frustration of purpose should carefully consider when and how to provide such notice, cognizant that the communication itself could be the key exhibit in a breach of contract action.
Conclusion
The application of a force majeure provision or the doctrines of impossibility or frustration of purpose in the context of COVID-19 will depend on the specific language of the contract, the applicable law, and the underlying circumstances leading to the non-performance.
The potential for post-crisis litigation is significant.
For additional questions about Force Majeure related issues, contact members of the McGuireWoods COVID-19 Response Team.
1. Black’s Law Dictionary (11th ed. 2019)
2. Neal–Cooper Grain Company v. Texas Gulf Sulphur Company, 508 F.2d 283, 293 (7th Cir.1974) (applying elements of Uniform Commercial Code impracticability defense despite the fact that the contract contained a force majeure clause that specifically enumerated excusing events)
3. Waldinger Corp. v. CRS Group Engineers, Inc., Clark Dietz Div., 775 F.2d 781, 786 (7th Cir. 1985) (citations omitted)
4. See Neal–Cooper , supra note 2; see also Matter of Westinghouse Elec. Corp. Uranium Contracts Litig. , 517 F. Supp. 440, 459 (E.D. Va. 1981) (“Because of the same factors which compelled the Court to reject Westinghouse’s defense of commercial impracticability, it is unable to view Westinghouse’s obligation as discharged under the force majeure clause.”)
5. Restatement (Second) of Contracts § 265
6. OWBR LLC v. Clear Channel Communication, Inc. , 266 F. Supp. 2d 1214, 1222 (D. Hawaii 2003) (quoting Restatement (Second) of Contract § 261, Comment B); see also id. at 1222 (“[C]ourts interpreting force majeure provisions have held that nonperformance dictated by economic hardship is not enough to fall within a force majeure provision.”); American Trading & Production Corp. v. Shell Intern. Marine, Ltd. , 453 F.2d 939, 942 (2d Cir. 1972) (“Mere increase in cost alone is not sufficient excuse for non-performance.”)