COVID-19 Coronavirus: Will Global Pandemic Excuse Contractual Performance?

A Review of U.S. Law on Force Majeure, Frustration of Purpose, Impracticability, and Impossibility

The current outbreak of the coronavirus (also known as COVID-19), recognized by the World Health Organization as a global pandemic, has already had a significant effect on certain businesses and appears likely to have an even greater impact, raising widespread concerns about the ability to perform and cost of performing under commercial contracts. Through government-mandated quarantines, travel restrictions, supply shortages, labor shortages, demand reductions and other complications caused by COVID-19, there are many ways in which contractual performance has become and could become even more challenging. Parties to commercial contracts – whether seeking to enforce counterparties’ contractual obligations or seeking to be excused from their own performance – must consider the potential applicability of the following defenses:

• Force Majeure Contract Clauses; and/or
  
• Extra-Contractual Doctrines, such as
  
  • Impossibility of Performance;
    
  • Impracticability of Performance; and/or
    
  • Frustration of Purpose.
    

In addition, if one of these defenses potentially applies, the party will need to consider the effect of the defense in terms of allocating various costs and expenses between the parties.

Force Majeure Contract Clauses

Force majeure clauses generally provide that upon the occurrence of specified events, and subject to certain conditions, a party to a contract will be relieved to some extent from its duties thereunder. Under U.S. law, enforceability of such clauses is a function primarily of their express language. Courts resolving disputes over force majeure provisions consider the language thereof and apply state law to determine the parties’ intentions.¹ Ultimately, the burden of demonstrating entitlement to relief is on the party seeking to have its performance excused.²

In determining whether a force majeure clause applies, the first thing to consider is whether the event at issue is covered by the clause. Typically, covered events include acts of god, war, strikes, and governmental prohibitions, among other things that are out of the parties’ control. Some contracts expressly refer to epidemics and quarantine restrictions. Others also include a catchall provision intended to encompass events that are not expressly identified.

If an event is not specifically listed in the contract, a court is likely to construe the force majeure clause narrowly.³ Some courts further limit the scope of force majeure events by imposing extra-contractual requirements. For example, a non-performing party may be required to “demonstrate its efforts to perform its contractual duties despite the occurrence of the event that it claims constituted force majeure.”⁴ Such a party may also be required to show that the claimed triggering event was unforeseeable.⁵

In addition to considering whether a particular event is within the scope of a force majeure clause, it is important to determine whose performance must be impacted. If a clause applies only when one party’s performance is impaired, then an event that impacts the other party will not relieve the first party from performing.⁶ One must also determine whether the clause conditions relief on the provision of prompt written notice or the satisfaction of any other negotiated criteria.

If a recognized force majeure event occurs and the conditions for relying upon it are met, it is necessary to consider the type and duration of relief available. Most force majeure clauses allow parties to suspend performance for the duration of the force majeure event, take additional time for performance, and/or terminate the contract if the event continues for longer than an agreed time.⁷

Whether COVID-19 constitutes a force majeure event excusing performance will depend primarily on the language of the relevant contract. Although one court suggested in dicta that the avian flu may have qualified as a force majeure event because it was unforeseeable,⁸ there could be factual questions about whether and the extent to which COVID-19 was unforeseeable given prior global health emergencies involving SARS, Avian Flu, Swine Flu and the Zika virus. However, factors that could distinguish COVID-19 from previous situations include the dramatic impact COVID-19 has had on business due to the rapid spread of the virus, business closures, and travel restrictions, including the most recent prohibitions on certain travel to the U.S. It will likely be important, as well, to determine whether the virus has delayed or prevented performance under the contract or resulted in significant financial harm, since a change in market conditions – even a substantial one – has been found not to constitute a force majeure in the absence of language encompassing such an event.⁹ Ultimately, if there is ambiguity about the scope of the clause or factual disputes about the availability of relief, a trial would likely be required to resolve such issues.¹⁰

Extra-Contractual Defenses

Regardless of whether a contract contains a force majeure clause and whether it relieves a party from its contractual obligations, performance may also be excused through other defenses¹¹, including frustration of purpose, impracticability and impossibility, though entitlement to these defenses is generally very difficult to establish, especially among sophisticated parties.

Frustration of Purpose

When the essential benefit expected under a contract is no longer available to a party through no fault of its own, the party may wish to consider whether performance may be excused under the doctrine of frustration of purpose. The Restatement, Second, of Contracts § 265 (1981) provides:

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 the circumstances indicate the contrary.

Frustration of purpose is typically asserted by the party required to pay under the contract. This is because the ability to pay is rarely impossible, but the purpose for paying the money may be frustrated. For example, a court discharged a restaurant from its obligation to make lease payments for a neon sign and tubing after the government implemented emergency war measures, ordering the cessation of all outside lighting in the district where the restaurant was located.¹²

Under New York law, frustration of purpose discharges a party’s performance when a “‘wholly unforeseeable event renders the contract valueless to one party.’”¹³ For the doctrine to apply, “the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.”¹⁴ And the frustrated purpose must be that of the party seeking to be excused from performance.¹⁵

Whether complications from COVID-19 will allow a party to be excused from performing under a contract will likely depend on whether the party seeking relief can persuade a fact-finder that its principal purpose for entering into the contract has been frustrated by such complications, through no fault of its own, and that the complications were unforeseeable.

Impracticability of Performance

When performance has become significantly more burdensome than anticipated due to an unforeseen event, a party may wish to consider whether its performance might be excused under the doctrine of impracticability of performance. The Restatement (Second) of Contracts § 261 (1981) states:

Where, after a contract is made, 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.¹⁶

For example, where a power company entered into a contract with a contractor to remove and dispose of spent nuclear fuel, the court found the contractor’s performance was impracticable after the federal government unexpectedly discontinued reprocessing of nuclear fuel at that facility.¹⁷ The court found that because reprocessing the nuclear fuel was the only viable method of disposal and using an alternative facility would have cost the contractor more than $80 million, the contractor’s performance was impracticable.¹⁸

In determining whether relief is available under this doctrine, a court must conduct a highly fact-specific inquiry. Performance may be “impracticable because extreme and unreasonable difficulty, expense, injury, or loss to one of the parties will be involved.”¹⁹ “A severe shortage of raw materials or of supplies due to war, embargo, local crop failure, unforeseen shutdown of major sources of supply, which either causes a marked increase in cost or prevents performance altogether may bring the case within the rule....”²⁰ It is not enough for performance to have become economically burdensome; it is also necessary that the cause of the burden be due to an unforeseen contingency, the absence of which was a basic premise of the parties’ agreement.²¹

Whether complications from COVID-19 will entitle a party to relief under the impracticability doctrine will likely depend not only on whether the complications were reasonably foreseeable but also on whether their impact results in extreme hardship that the parties did not anticipate or could not have reasonably anticipated.

Impossibility of Performance

If performance has become literally impossible due to an unforeseen event, performance might be excused under the doctrine of impossibility. However, the bar for establishing an entitlement to this defense is very high. Under New York law, performance is excused as impossible only where “an unanticipated event that could not have been foreseen or guarded against in the contract” makes performance “objectively impossible.”²² The impossibility defense is not available when performance becomes economically burdensome.²³

It is well established that the impossibility defense may excuse performance when parties have been unable to perform due to governmental regulation or order that was not reasonably foreseeable.²⁴ Such regulation or order may be domestic or foreign and may emanate from any level of government, including administrative agencies.²⁵ At least one court has also recognized the viability of the defense in a case where a party claimed that the aftermath of September 11th prevented timely compliance with a termination provision, holding that if the party could establish objective impossibility, she would be entitled to reasonable suspension of her obligation to cancel timely or to a total excuse of untimely cancellation.²⁶

Whether complications from COVID-19 will allow a party to be excused from a contract under the doctrine of impossibility will likely depend on whether and the extent to which the party seeking relief can persuade a fact-finder that performance was objectively impossible as a result of such complications. If performance depends on doing an act that has been prohibited by the government, such as traveling to the U.S., then a court could excuse performance as being objectively impossible. However, if reasonable parties could have taken or could take steps to perform in an alternative way, even if doing so is more expensive than performance would have been as originally contemplated, then a court would likely decide that performance is not excused under the doctrine of impossibility.

Remedies

When a court finds that one of the extra-contractual defenses is applicable, the party claiming the defense generally has the balance of its performance excused, and the contract is rescinded. However, the court must then decide if additional remedies are applicable. For example, courts will often allow quantum meruit claims and award restitution of any benefits conferred on the non-performing party to avoid its receiving a windfall.²⁷ The court may also grant other relief as justice requires, such as requiring the non-performing party to reimburse the performing party for expenses it incurred in reliance on the contract.²⁸

Courts are generally reluctant to excuse performance based on the doctrines of frustration of purpose, impracticability or impossibility. Under the best circumstances, a court is likely to find there are factual questions about whether the requirements for invoking the doctrines have been met that necessitate a trial. If the court finds that the complications from COVID-19 were reasonably foreseeable, that they could have been addressed in a contract or that they did not have an effect on performance, the court is likely to deny relief under these extra-contractual doctrines.²⁹

Footnotes

1) See VICI Racing, LLC v. T-Mobile USA, Inc., 763 F.3d 273, 288 (3d Cir. 2014).
2) See Phillips Puerto Rico Core, Inc. v. Tradax Petroleum, Ltd., 782 F.2d 314, 319 (2d Cir. 1985).
3) See Kel Kim Corp. v. Central Markets, Inc., 519 N.E.2d 295, 296-97 (N.Y. 1987) (“Ordinarily, only if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused. . . . . [Catchall provisions] are confined to the same kind or nature as the particular matters mentioned [in the force majeure clause].”); but see Int’l Automotive Showcase, Inc. v. SMG, No. CV030477177S, 2004 WL 1833312, *2 (Conn. Super. Ct. July 21, 2004) (finding force majeure clause was broad enough to cover the closure of a coliseum intended to have been used for an auto show, even though the closure was not specifically listed in the clause).
4) Phillips, 782 F.2d at 319.
5) See Rexing Quality Eggs v. Rembrandt Enterprises, Inc., 360 F.Supp.3d 817, 840–42 (S.D. Ind. 2018) (refusing to excuse performance where egg reseller asked for performance to be excused under force majeure clause due to decline in demand for eggs, on ground that “a change in purchaser demand—even a substantial change—is a foreseeable part of doing business”).
6) See Rembrandt Enters. v. Dahmes Stainless, Inc., 2017 U.S. Dist. LEXIS 144636, *35–36 (N.D. Iowa Sept. 7, 2017) (finding that force majeure clause did not allow one party to terminate contract where the clause only addressed situations which would delay or prevent the other party’s performance).
7) See e.g., Reade v. Stoneybrook Realty. LLC, 63 A.D.3d 433, 434 (N.Y. App. Div. 2009) (finding that judicial restraining order that delayed landlord’s delivery of premises constituted a “governmental prohibition” that excused landlord’s performance while the order was in effect).
8) See Rexing Quality Eggs, 360 F.Supp.3d at 840-41.
9) Id. at 841-42; see also Kyocera Corp. v. Hemlock Semiconductor, LLC, 886 N.W.2d 445, 452–54 (Mich. Ct. App. 2015) (finding that deflation of solar industry market was not a force majeure event, especially where risk was assumed by plaintiff in its take-or-pay contract).
10) See STI Oilfield Servs. v. Access Midstream Partners, No. 3:13-CV-02923, 2017 U.S. Dist. LEXIS 31442, *33–35, (M.D. Pa. Mar. 6, 2017) (where a clause identified an act of god and action of the elements as covered events, a court found the clause ambiguous as to whether it covered a hurricane and sent the issue to a jury).
11) See Rembrandt Enters., 2017 U.S. Dist. LEXIS 144636, at *40.
12) See 20th Century Lites, Inc. v. Goodman, 149 P.2d 88, 92 (Cal. App. Dep’t Super. Ct. 1944).
13) Axginc Corp. v. Plaza Automall, Ltd., 759 F. App’x 26, 29, (2d Cir. 2018) (quoting United States v. Gen. Douglas MacArthur Senior Vill., 508 F.2d 377, 381 (2d Cir. 1974)); see also Warner v. Kaplan, 71 A.D.3d 1, 5 (N.Y. App. Div. 2009). 
14) Warner, 71 A.D.3d at 5 (internal quotation marks and citation omitted) (affirming grant of summary judgment for seller where buyer’s death certainly frustrated the purpose of the contract but where the death was foreseeable and even provided for by way of a provision governing successors and assigns).
15) See Rembrandt Enters., 2017 U.S. Dist. LEXIS 144636, *at 20-21.
16) See also U.C.C. § 2-615 (amended 2002).
17) See Florida Power & Light Co. v. Westinghouse Electric Corp., 826 F.2d 239, 274 (4th Cir. 1987).
18) Id. at 277; see also Int’l Automotive Showcase, Inc., 2004 WL 1833312, at *2 (Conn. Super. Ct. July 21, 2004) (finding breach of contract was excused under the doctrine of impossibility where coliseum was closed by a third party during the time frame plaintiff contracted to hold an auto show there).
19) Restatement (Second) of Contracts §261 cmt. d (1981).
20) Id.
21) See Rexing Quality Eggs, 360 F.Supp.3d at 842.
22) See Kel Kim Corp., 519 N.E.2d at 296.
23) See Warner, 71 A.D.3d at 5.
24) See Restatement (Second) of Contracts § 264 (1981); see also Uniform Commercial Code § 2-615(a).
25) See Restatement (Second) of Contracts § 264 cmt. d (1981).
26) See Bush v. Protravel International, Inc., 746 N.Y.S.2d 790, 797 (N.Y. Civ. Ct. 2002) (excusing plaintiff’s late cancellation of safari where events following the September 11, 2001 terrorist attacks prevented communication with the tour company); but see United States Bancorp Equip. Fin., Inc. v. Loews Express L.L.C., No. 06-10944, 2008 U.S. Dist. LEXIS 1542, *8–16 (E.D. La. Jan. 8, 2008) (refusing to excuse the defendant’s obligation to pay rent on tour busses following Hurricane Katrina, despite the government’s having commandeered the busses and the defendant’s business having suffered significant disruption, since payment was not objectively impossible).
27) See D & A Structural Contrs. Inc. v. Unger, 901 N.Y.S.2d 898, 898 (N.Y. Sup. Ct. 2009) (allowing quantum meruit causes of actions to proceed to trial where contractors began to restore a home after a fire before homeowner’s performance was excused under frustration of purpose doctrine).
28) See id. (“The Court may grant relief on such terms as justice requires, including protection of the parties' reliance interests. In addition, the Court may supply a term that is necessary for a determination of the parties' rights and duties.”) (internal citations omitted).
29) See, e.g., Axginc Corp., 759 F. App’x at 29 (affirming lower court’s rejection of impossibility and frustration of purpose defenses on summary judgment where non-performing party failed to present evidence that its difficulty in obtaining flood insurance was unforeseeable when contract was entered into after Hurricane Sandy had occurred and had resulted in the destruction of the party’s inventory); Ner Tamid Congregation v. Krivoruchko, 638 F. Supp. 2d 913, 925–28 (N.D. Ill. 2009) (declining to excuse buyer from obligation to purchase property on grounds of impossibility or frustration of purpose where court found the depth of the 2008 financial crisis was foreseeable); PPF Safeguard, LLC v BCR Safeguard Holding, LLC, 85 A.D.3d 506, 508 (N.Y. App. Div. 2011) (finding frustration of purpose defense unavailing where the purpose of contract was to induce purchase of interest in company by promising to make bonus payments and Hurricane Katrina had no effect on the value of the company).