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Your Contracts in a Coronavirus World

This article appeared in the April 2020 issue of MiMfg Magazine. Read the full issue and find past issues online.

The Coronavirus is raising issues regarding whether preexisting legal obligations can be excused when a pandemic hits. Generally speaking, three legal principles address this issue: force majeure, impossibility of performance and frustration of purpose.

Force majeure is a contractual provision that excuses performance when circumstances beyond the parties’ control render performance untenable or impossible. Generally, for a force majeure provision to excuse performance, three requirements must be present:

  1. The performance-excusing event must be identified in the language of the force majeure provision
  2. The party relying on the force majeure provision must demonstrate that the event rendered performance objectively impossible and not merely more burdensome or expensive; and
  3. The performance-excusing event must be beyond the parties’ reasonable control, meaning the party relying on force majeure did not cause the event and was diligent in taking reasonable steps to ensure performance

Financial circumstances, however — even if caused by a catastrophe — usually do not to constitute a force majeure, absent specific contractual language to the contrary.

Impossibility of performance is an affirmative common-law defense to a breach of contract. Like force majeure, its scope is narrowly construed. Unlike force majeure, however, impossibility of performance is not a negotiated contractual provision. Instead, it is available to excuse performance when there is:

  1. An unexpected intervening occurrence
  2. That it was of such a character that its nonoccurrence was a basic assumption of the parties’ agreement
  3. The intervening occurrence made performance impossible, or at least commercially impracticable.

A traditional example of impossibility of performance would be a banquet hall’s excuse from its obligations to rent out the hall when a power failure in the surrounding area prevents the hall from being used. Even in the absence of a force majeure provision listing power failure as a performance-excusing event, the defense of impossibility of performance would be available.

Frustration of purpose is similar to impossibility of performance and is a common-law defense to performance. It arises when:

  1. The party’s principal purpose in making the contract is frustrated
  2. Without that party’s fault; and
  3. By the occurrence of an event, the non-occurrence of which was a basic assumption in the contract.

Under the doctrine of frustration of purpose, performance is excused not due to impossibility but because a supervening event causes a failure of consideration or a total destruction of the expected value of the performance.

As Coronavirus-related contractual matters arise, expect these three defenses to be applied based on the parties’ intent, general principles of contractual interpretation, and the specific facts at issue. If the force majeure provision includes express language excusing performance due to “epidemic” or “public health crisis,” a strong argument for excusing performance can be made. Further, if a party cannot perform because of a government shut-down order or if the entire purpose of a contract is rendered worthless (like a two-week lease for a pop-up store during the Easter holiday), a strong argument can be made to excuse performance.

For more information, see pepperlaw.com.


Premium Associate MemberPepper Hamilton is an MMA Premium Associate Member and has been an MMA member since July 2002. Visit online: pepperlaw.com.

About the Authors

Matthew H. AdlerMatthew H. Adler is a partner in the Litigation Department of Pepper Hamilton LLP. He may be reached at 248-359-7300 or adlerm@pepperlaw.com.

 

Angelo A. Stio, IIIAngelo A. Stio, III is a partner in and vice chair of Pepper Hamilton LLP’s Trial and Dispute Resolution Practice Group. He may be reached at 248-359-7300 or stioa@pepperlaw.com.

 

Jason J. MoreiraJason J. Moreira is an associate in the Trial and Dispute Resolution Practice Group of Pepper Hamilton LLP. He may be reached at 248-359-7300 or moreiraj@pepperlaw.com.