Overview

Depending upon specific contract language and case-by-case facts and circumstances, there are certain legal doctrines available to excuse delay in performance or non-performance of contractual obligations caused by COVID-19. These legal theories and their application will vary further based on governing law as specified in the agreement or as may be applicable based on location of performance or other factors. The doctrines generally available when analyzing excusable delays or nonperformance include:

• contractual force majeure clauses, or force majeure exceptions provided for in civil law or by specific statute
• impracticability and impossibility
• frustration of purpose

These theories have similar elements generally excusing performance when some unforeseen event beyond the parties’ control either delays or renders performance nearly impossible or defeats the purpose on which the contract was based.

Force majeure clauses

Absent application of civil laws or other specific statutory provisions that may apply depending upon a unique jurisdiction, the express terms of the governing contract will define the rights and liabilities and allocate the risks of the respective parties in the event performance becomes delayed, impossible or impractical as a result of the occurrence of an unanticipated event. Narrowly construed, force majeure clauses usually recite customary specific events that may be relied upon as the basis for delayed or excused performance, so long as such events are the either the sole or primary cause of such delayed or otherwise excused performance. Certain force majeure clauses may also address other additional specific events tailored to the specific facts and circumstances involved and the expectations of the parties. In most cases force majeure clauses contain a catch-all provision capturing any and all events beyond the control (or reasonable control) of the delayed or non-performing party (not caused by its own actions or omissions). Additionally, some contracts may expressly require notice that the event be beyond a party’s control and not caused by its actions.

The delayed or nonperforming party typically is required to exercise reasonable efforts to overcome or mitigate the effects of a delay or nonperformance caused by a force majeure event, and some contracts may address periods of time in which the matter is resolved or by which either or both parties may terminate or suspend performance or exercise other remedies, while some are silent as to remedies other than excusing the delay or performance.

Generally, the force majeure event must be beyond the control of the party and must be one that could not have been avoided by the exercise of due diligence, prudence, or care; however, in some instances, if these terms are not express requirements of the contract, a court will not imply such terms. Importantly, a party is not excused merely because performance would be difficult, burdensome, or economically disadvantageous. For instance—and particularly relevant in the current crisis—worsening economic conditions or the inability to purchase a commodity at a certain price does not excuse delay or performance unless specified in the contract. In cases of mere economic hardship, the party failing to deliver goods or services may be required to pay costs for replacement goods or services, if it is reasonable to find such replacements; however, if a contract limits consequential damages, these are not recoverable. Conversely, in a true force majeure event where performance is impossible, a party may be fully excused from performing and not liable for any damages.

In some jurisdictions if the force majeure event is not expressly enumerated within the force majeure clause, the event must also have been “unforeseeable.” Also, if an event is not expressly enumerated, then in order to determine whether an event is covered by a “catch-all” provision, courts will look to the surrounding language and intent of the contract to determine whether the particular event in question is the same type or class of events as those specifically enumerated. Courts generally will stick to the terms of the contract, so ultimately, whether or not a contract provides for excusing delay or nonperformance will depend on the specific language, such that even those issues that might seem peripheral—like contractually required notifications—could be hugely significant if a party fails to abide by a contract’s requirements.

Impracticability and impossibility

Impracticability (interchangeable with impossibility) excuses performance where that performance is made impracticable when an event occurs—through no fault of the party—and the non-occurrence of that event was a basic assumption of the contract in question. The continued existence of certain market conditions or the financial conditions of the parties, considered in isolation, is generally not a basic assumption of contracts. A disruption in such conditions may not justify a claim of impracticability or impossibility. This doctrine applies to both sale of goods (UCC § 2-615) and sale of services (courts generally apply Restatement (Second) of Contracts § 261, or common law principles).

There is significant overlap with impracticability and impossibility clauses and those associated with force majeure. Some jurisdictions also have a “common law force majeure” doctrine which operates similar to impracticability and impossibility. Like force majeure clauses, impracticability and impossibility clauses generally cover “acts of God” or acts of third parties and must be both unforeseeable and beyond the control of the party. For example, domestic and foreign regulations or laws impacting performance are generally covered events, so long as the regulation or law was passed after entering the contract.

Impracticability requires that a party must show more than a mere increase in difficulty or cost to perform; however, performance does not need to rise to the level of impossibility. This theory is generally available only for sellers or those performing the service, as courts recognize that rarely is it impracticable or impossible to provide payment for goods and services rendered. Impracticability and impossibility may each constitute grounds for termination without liability; however, when impracticability is only temporary, obligations are merely suspended, not terminated, unless performance after the event would be more burdensome than had there been no impracticability

It is important to note that, where sophisticated parties or parties with superior knowledge are concerned, certain events may be considered “business risks” regarded as part of negotiated terms of a contract, rendering the doctrine inapplicable and leading a court to find the party assumed the risk when it entered into the contract.

Frustration of purpose

Frustration of purpose excuses performance where the party seeking discharge no longer has the motivation to perform which originally induced its participation in the contract. As above, this doctrine applies to the sale of both goods and services and generally requires that the purpose that is frustrated was a principal purpose in forming the contract, without which the transaction would make little sense. This requirement sets a high bar to demonstrate that it truly was a purpose of entering into the contract.

The frustration must be so severe that it is not fairly to be regarded as within the risks assumed under the contract, and the non-occurrence of the frustrating event must have been a basic assumption on which the contract is made. The “leading case” on this theory involved an instance where an individual rented hotel suites in order to watch the coronation of Edward VII in June 1902; however, the monarch-to-be had to delay the ceremony until August due to a bout of appendicitis, providing very short notice to the public regarding the change of plan. The renter was excused from the contract because his motivation in renting the rooms was no longer present.

This theory can be viewed as the counterpart to impossibility and is generally designed to protect buyers. Like impracticability, when the frustration is merely temporary, obligations are merely suspended.

Conclusion

Aside from the obvious public health consequences of COVID-19, we anticipate significant economic and financial dislocation resulting from the outbreak and the countermeasures undertaken to mitigate its impact. As explored above, mere economic hardship generally forms an unsatisfactory basis for seeking a remedy through force majeure-like theories, but every circumstance is different.

Longtime business partners will likely have every incentive to arrive at mutually beneficial arrangements; however, when parties to a contract disagree about contractual obligations in the context of COVID-19, litigation undoubtedly will ensue from time to time to resolve these disagreements. Given the vast differences in governing law and contract language, it is wise to consult with experienced legal counsel in assessing options, both for parties seeking a delay or excuse for non-performance, as well as for parties that are on the receiving end of such assertions.