The coronavirus pandemic and the government restrictions imposed as a result of the pandemic have rendered performance of contracts difficult, if not impossible. Before attempting to terminate a contract due to the pandemic or such restrictions, parties should understand the doctrine of force majeure (literally a "greater force," which prevents performance), and the related doctrines of impossibility of performance or of commercial impracticability.
As a starting point, these doctrines are contractual principles and apply only to written contracts. They are determined by the common law of each state and are subject to three general rules of contract interpretation applicable to all contracts. First, courts interpret contracts by seeking to discern the intent of the parties, and look for that intent in the language of the contract itself. Thus, in determining whether the contract excuses performance due to pandemics, "acts of God," or "circumstances beyond a party's control," the first place to look is to the contract language itself.
Second, if the language of the contract is ambiguous—and most contracts likely don't mention pandemics—courts look to the intent of the parties at the time the contract was executed. That intent may be shown by a reading of the entire contract, or the circumstances that existed at the time the contract was executed. Under this rule of contract interpretation, the relevant questions might be: "What could the parties have anticipated? What were the basic assumptions about performance when the contract was made? For example, did both parties assume that they would be able to perform, or did both parties fail to anticipate the occurrence preventing performance (in this case the pandemic) or the government regulations resulting from it.
Third, contracts are often about the assignment of risks. If an event was foreseeable, or should have been, at the time the contract was made, courts will likely assign the risk to the party seeking to excuse performance or terminate the contract. Moreover, courts are reluctant to reassign risks and thus interpret these doctrines narrowly.
Many contracts have provisions that excuse performance where events occur that are beyond the control of the parties. These are often referred to as force majeure clauses. The clauses typically excuse performance or limit damage due to the occurrence of events such as floods, hurricanes, tornadoes, "acts of God," or general catch-all phrases such as "circumstances beyond the control of the parties." Some key points to keep in mind when considering whether these clauses excuse performance as a result of the current pandemic are the following:
1. The language of the contract controls.
If the contract mentions terms such as "pandemics," "public health emergencies," or "outbreaks of communicable diseases," performance will likely be excused. Terms such as "government regulation," "administrative action," or "disruption to the labor force" may also lead to this result, depending on the circumstances. On the other hand, some courts have found that the term "acts of God" does not include diseases or pandemics. Where the contract references a series of occurrences such as natural disasters, and then adds a general term such as "acts beyond the parties control," courts will typically limit the general clause to the types of events or occurrences specified in the contract.
2. Courts interpret these clauses narrowly.
Since courts look to find the intent of the parties when construing contract language, they are reluctant to excuse performance by substituting the court's judgment for that of the parties. Force majeure clauses are to be interpreted in accord with their function, which is to relieve a party of liability when the parties' expectations are frustrated due to an event that is an extreme and unforeseeable occurrence beyond a party's control, and without its fault or negligence. As a result, these clauses are often construed narrowly and will generally excuse a party's nonperformance only if the event causing that nonperformance is specifically identified. Put simply, unless a contract provision specifies pandemics, government actions preventing performance, or specific language that would encompass the coronavirus, it is unlikely that performance will be excused.
3. Is the coronavirus the reason for non-performance?
Even if the contract language is precise, the occurrence—in this case the virus or the government restriction—must actually prevent performance, not simply make it more difficult or expensive. A force majeure clause therefore may not be invoked on economic grounds. In addition, such clauses do not apply if the party invoking the clause was in breach before the occurrence of the event that is being used to trigger the clause. Thus, if a party was in breach before the coronavirus began or government restrictions were imposed, the clause is likely inapplicable. Likewise, if the occurrence could be mitigated by later performance, or a party could perform despite the virus or the government restrictions, the force majeure clause will not excuse performance. Since the occurrence must actually prevent performance, a party seeking to terminate the contract should ask whether it was to be performed in its entirety during the period of occurrence or restriction, as opposed to the possibility of performance at a later date (for example, by a postponement).
Parties should also consider whether the reason for termination or non-performance is the virus, or the government restrictions resulting from it. Force majeure clauses are aimed narrowly at events that neither party could foresee or guard against in the agreement. If the language of the contract does not cover pandemics, it might cover government restrictions preventing performance and which might not have been foreseeable.
4. Parties should be cautious before exercising a force majeure clause.
Many force majeure clauses require that specific notice be given before they are invoked. A careful review of the contract is necessary since the failure to provide notice may cause a waiver of contractual rights. Parties seeking to invoke the clause should also evaluate whether there are alternatives to performance, such as the possibility of delaying performance. If so, the clause may not excuse performance but will simply delay it. As with all instances in which a party terminates a contract, there is an obligation to mitigate damages. Before acting to terminate by invoking a force majeure clause, the invoking party should take all possible steps to limit its damages.
Contract disputes can often be avoided by seeking a resolution with the other party to the contract. This may be especially true during the current pandemic, which may result in each side to a potential contract action being unable to perform. Thus, communication with the other party at an early date—and before invoking the clause—would be wise. If a resolution is not possible, the party seeking to invoke the clause should consider whether doing so will allow the other party to terminate the contract and to seek damages. Regardless of the action taken, both parties to the contract should document all decisions leading up to invoking the force majeure clause or termination.
Impossibility or Impracticability of Performance
The doctrines of impossibility or commercial impracticability also presume the existence of a contract. Like force majeure, a party claiming impossibility or commercial frustration must demonstrate that performance is impossible, not merely uneconomical. Courts are reluctant to conclude that performance is impossible or impractical because these doctrines may reallocate contract risks.
The use of these principles to terminate or excuse performance under a contract may, ironically, be more available in the current pandemic than reliance on force majeure. Because force majeure depends on the interpretation of specific terms of a contract, application of that doctrine may be prevented by a judicial determination that having foreseen the specific events set out in the contract, the parties cannot now claim that other events were not foreseeable. Thus, the existence of a force majeure clause may preclude a party from invoking impossibility of performance. By contrast, in the absence of a force majeure clause, the party seeking to excuse performance may be able to argue that a broader category of events were not foreseeable.
The excuse of impossibility or commercial impracticability has two requirements. First, performance must be impossible, or so impracticable that the contract cannot be performed. For example, if parties have contracted for renovation of a building that is destroyed by fire, performance would be excused. Second, the inability or impracticability of performance must have been caused "by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made." In short, did subsequent events essentially destroy the purpose for which the contract was made, and which the parties would have regulated by agreement if the necessity to do so had occurred to them. An example of such an event might be an international conference scheduled at a hotel in Europe. Both parties to the contract would assume that individuals would be able to travel internationally, and that gatherings would not be restricted to groups of less than ten.
Analysis of the impossibility or impracticability of performance in the current situation of a pandemic again rests on what the contracting parties could have foreseen and where the contractual risks were assigned. Thus, before relying on these doctrines in an attempt to excuse contractual performance, parties should ask whether the contingency that developed was one that the contracting parties could have foreseen as a real possibility. Disease certainly is foreseeable, but pandemics shutting down most of the world economy likely are not. If the risk was assigned (explicitly or otherwise) to one party, then performance will not be excused. But if the risk was not foreseeable, the contract cannot reasonably be thought to govern that situation and both parties are excused from performance.
In sum, impossibility and impracticability of performance are often thought of as "gap filler" doctrines available when parties could not have anticipated certain events and courts are cautious in applying them. It remains to be seen whether courts will excuse performance under these doctrines based on the current pandemic, or the government restrictions resulting from it.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.