Excusing Contractual Performance Issues Arising From COVID-19: Force Majeure and the Related Doctrines of Impossibility and Frustration

COVID-19
April 3, 2020
 

Now that the Ohio Department of Health has extended through May 1 the Stay-at Home-Order issued on March 22, 2020, which directs all non-essential businesses and operations in Ohio to cease all activities except minimum basic operations, many of these businesses may be facing contractual obligations that simply cannot be performed. Products cannot be delivered, services cannot be performed, and sports and entertainment productions have gone dark. From the airline industry to travel and tourism, to factory shutdowns and associated supply chain issues, to local restaurants and bars either shuttered or providing take-out only, there may be few, if any, businesses that remain untouched.

Faced with these difficulties and uncertainties, many businesses in Ohio and other states are reviewing their contracts to determine what relief may be available to them, or to their contractual counterparties, for performance delays, disruptions or shutdowns. In many cases, the language of the contract will address this issue specifically, typically in a force majeure clause. However, where the contract is silent, vague or open-ended, the common law defenses of “impossibility of performance” and “frustration of purpose” may provide relief.

Force Majeure


Force majeure means, literally, “superior force,” and a force majeure clause in a contract defines the scope of unforeseeable events that might excuse nonperformance by a party. The party that cannot fulfill its contractual obligation has the burden of proving that the event was beyond its control and without its fault or negligence. A party cannot claim force majeure simply because it was mistaken about future events or worsening economic conditions. Importantly, the language of the contract is critically important in determining whether it applies and what its effects are – force majeure clauses will not be implied in contracts under U.S. law.

Whether the COVID-19 pandemic constitutes a force majeure event will depend on the language of the contract in question. Many contracts specify a long list of stipulated force majeure events, which may include pandemics, travel bans, quarantines or government actions. Each of these appears to support a force majeure defense. In other contracts, the force majeure clause is drafted generically (e.g., “events beyond the reasonable control of a party”). Such language might still support a force majeure defense, but there is considerably more uncertainty in the position.

Many contracts expressly exclude economic downturns, or economic conditions generally as possible force majeure events. In determining whether the force majeure clause is applicable, a party must evaluate whether the contract allocated the risk of the contingency. If so, then the circumstance, no matter how difficult, is likely not a force majeure event. Importantly, mistaken assumptions about future events or bad economic conditions do not qualify as force majeure.

In addition, even if an event qualifies as a force majeure, the party invoking the clause will be required to prove that the event caused its inability to perform under the contract, and possibly that the party made reasonable efforts to avoid non-performance, but failed. Many clauses state that payment obligations, like rent or other recurring charges, survive a force majeure event.

Depending on the particular clause, if a force majeure event causes a party’s non-performance under the contract, that party may be entitled to temporarily suspend its performance obligations, to extend deadlines, or even to terminate the contract altogether. If the force majeure clause applies, the contracting parties should be careful to follow any applicable notice or update provisions in the contract.

Impossibility or Impracticability of Performance


If the contract in question does not have a force majeure or similarly worded clause, state contract law may nevertheless imply similar protections and benefits. If the contract involves a sale of goods subject to the Uniform Commercial Code, UCC 2-615 provides that delay in delivery or non-delivery is not a breach if performance “has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”

For other contracts, most states follow the similar guidance of the Restatement (Second) of Contracts, which provides that if “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, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.” In some states, such as Ohio and New York, impracticable is equivalent to impossible. For example, New York law limits the doctrine of impossibility to cases where performance is “objectively impossible” due to the “destruction of the means of performance” by an act of God, force majeure event, or the subsequent passage of law rendering performance illegal, or where there has been a change in circumstances so fundamental that it would be unjust or contrary to public policy to hold the parties to their original agreement. Similarly, Ohio courts require a showing that an intervening and unforeseen event, such as a government order or mandate, renders impossible the performance of one of the contracting parties. Conversely, other state courts appear to recognize that the doctrine of impracticability does not mean performance must be impossible.

Impossibility does not apply to situations where performance has become prohibitively more difficult, impractical or expensive. In the context of the COVID-19 pandemic, impossibility may provide grounds for excusing performance if, for example, a government travel ban entirely precluded a party from performing its contractual obligation to deliver product. Even then, the party invoking the doctrine must show that the measures were unforeseeable and the risk associated with them could not have been built into the contract.

Because the State of Ohio’s Stay-at-Home Order currently is set to end on May 1 (but may be extended), what happens to a contract that cannot be performed while the Order is in effect?

Under Ohio law, if subsequently enacted laws or government action renders contract performance unlawful, the contract is at an end. However, if the government action temporarily prohibits performance of the contract without condemning the subject of the contract itself, the Ohio Supreme Court has opined that “the contract is still in force, though dormant, and when the restraint is removed, the obligation, which was all the while in force, must then be completely performed.”

Frustration


The common law of some states, including New York, offers a related, but separate, defense of frustration of performance. According to the Restatement (Second) of Contracts, where “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, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.” This doctrine is not widely accepted in Ohio. In New York, the “frustration of purpose” defense applies “where a virtually cataclysmic, wholly unforeseeable event” frustrates the purpose underlying the contract so completely that the contract is essentially rendered pointless for both parties. It is not enough that the transaction contemplated by a contract has become less profitable or even that it will sustain a loss.

As with impossibility of performance, frustration of performance is narrowly applied by the courts, and it will not apply where performance simply has become more expensive, or where the intervening event was foreseeable. In the context of the novel coronavirus outbreak, frustration could apply to the government cancellation of a specific sporting event, such that service providers for the event would be excused from performance.



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