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The Impact of Covid-19 on Commercial Contracts

May 17th, 2020 2:49pm - Posted By: Mark Cohen

The COVID-19 pandemic has caused many businesses to seek legal guidance concerning whether the crisis relieves them of their duty to perform contractual obligations.  Much of ensuing discussion has focused on force majeure clauses, but it is important to also consider the common law defenses of impossibility and frustration of purpose.

Force Majeure Clauses

A force majeure clause is a contract provision that excuses a party’s performance of its contractual obligations when circumstances beyond their control make performance commercially impracticable, illegal, or impossible. 

In general, a force majeure event must be an unforeseen event beyond the control of the parties, but the language of the contract may alter this. See, e.g., Perlman v. Pioneer Ltd. Partnership, 918 F.2d 1244 (5th. Cir. 1990). 

Changes in costs, market conditions, or taxes are generally not considered force majeure events.  See, e.g., Kyocera Corp. v. Hemlock Semiconductor, LLC, 886 N.W.2d 445 (Mich. Ct. App. 2015) (China‘s imposition of tariffs was not a Force Majeure event); Langham–Hill Petroleum, Inc. v. S. Fuels Co.,813 F.2d 1327 (4th Cir.1987)(rejecting claim for relief under force majeure where the government of Saudi Arabia acted to cause a collapse in world oil prices, making a contract unprofitable for one party); N. Ind. Pub. Serv. Co. v. Carbon County Coal Co.,799 F.2d 265 (7th Cir.1986)(holding that a government order denying a request from a utility to pass increased coal prices along to its customers did not excuse utility from a long-term contract to buy coal even though contract was unprofitable).

Not all force majeure clauses are the same.  Therefore, it is important to read the applicable clause with some specific questions in mind.

Is COVID-19 a Force Majeure Event?

Some force majeure clauses are broad and might refer to "any Act of God or other circumstance beyond the parties' control."  Others may list specific examples such as, “fires, floods, earthquakes, tsunamis, wars, terrorist attacks, strikes, civil unrest…"  Because each clause is unique, it's important to read the applicable clause carefully to determine whether the language clearly applies to the COVID-19 crisis. 

Does the Force Majeure Clause Excuse Performance or Merely Suspend It?

Some force majeure clauses excuse performance entirely while others merely suspend the requirement for performance until the unforeseen event no longer prevents performance.  Some force majeure clauses may carve out exceptions for duties such as the obligation to make payment, so it is important to look for any such exceptions.

Does the Force Majeure Clause Impose a Duty to Try to Respond to the Force Majeure Event?

A force majeure clause may impose on the parties a duty to try to take actions to mitigate or overcome the effect of the force majeure event.  It is important to determine whether such a duty exists and what steps, if any, a party might take to satisfy that duty.

Does the Force Majeure Clause Require That You Give Notice?

Many force majeure clauses require that a party desiring to excuse performance under the clause give written notice to the other party.  It's important to determine whether the clause requires notice and to provide any required notice in a timely manner and in the manner the contract requires. Any notice should track the language of the force majeure clause and include reference to any relevant specific events such as a government "Shelter at Home" order.  Any notice should also invoke the doctrines of commercial impracticability and/or frustration of purpose, if applicable.

Do Other Doctrines Apply?

Even if the COVID-19 crisis might not fall within the scope of a particular force majeure clause, two other common law contract defenses may apply. Those are commercial impracticability and frustration of purpose.

Commercial Impracticability or Impossibility

The common law contract defense of impossibility of performance is now often called commercial impracticability.  The Restatement (2d) of Contracts § 261 provides:

Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the nonoccurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

Commercial impracticability is an affirmative defense.

Frustration of Purpose

 A party need not fulfill its obligations under a contract if an unforeseen event makes it impossible to achieve the purpose of the contract.  For example, if the purpose of an organization's contract with a hotel is secure space for a convention, and a travel ban prevents the attendees from attending the event, the doctrine of frustration of purpose may apply.  Frustration of purpose is also an affirmative defense.  Keep in mind that courts will seldom accept the argument that the "purpose" of a contract was for one party to make a profit. 

 

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