COVID-19 and Contract Defenses
Force Majeure, Frustration of Purpose, and Impracticability of Performance
As COVID-19 continues to spread worldwide, now designated as a global pandemic by the World Health Organization and declared a national emergency in the United States, businesses will experience negative impacts related to the virus. Such impacts may include work interruptions, caused by employee absences, mandated quarantines, or otherwise; and upstream supply chain issues. The impacts of COVID-19 may prevent your company from performing its contracts. However, your company may have defenses to a claim for breach of contract for non-performance.
Potential defenses to contractual performance include invoking a force majeure clause, frustration of purpose, and impracticability of performance.
A force majeure clause is a common contractual provision that provides for delayed or excused performance in the event of certain contractually provided events outside of the control of the parties. A typical force majeure clause includes events such as: war, labor unrest, government actions, natural disasters, and, sometimes, a catch-all such as other “Acts of God” or “events outside the reasonable control of the parties.” Less often, force majeure clauses include specific reference to epidemics and pandemics. Whether you can invoke force majeure to avoid performance depends on the specific language in your contract and the facts surrounding non-performance.
Other potential legal doctrines to excuse performance are the doctrine of frustration of purpose and the related doctrine of impracticability of performance. Frustration of purpose and impracticability of performance both permit a party, so long as the party is not at fault, to discharge its obligation to perform on the basis of a supervening event (or non-occurrence of an event). For frustration of purpose, the party can discharge its obligation to perform if the supervening event destroys a principal purpose of the contract. For impracticability of performance, the party can discharge its obligation to perform if the supervening event or lack thereof was a basic assumption of the contract. Similarly to force majeure, whether your business can invoke frustration of purpose or impracticability of performance is a fact-specific inquiry.
Before exercising a contractual defense to delay or possibly excuse performance, whether by invoking force majeure, frustration of purposes, impracticability of performance, or otherwise, you should contact your attorney. Before invoking any defense, you must carefully analyze the specific contractual provisions at issue, the entire contract more broadly (i.e. provisions regarding notice, a duty to mitigate, remedies, and termination), applicable law of the jurisdiction governing the contract, and the facts giving rise to non-performance. After you’ve fully analyzed the situation you can begin to determine how to act, in a prudent manner to preserve your defenses while avoiding an anticipatory breach by prematurely invoking a defense to performance.
The bottom line is that it is a near certainty that Coronavirus and COVID-19 will impact your contractual obligations. The availability of any particular defense will be largely dependent on the terms of each particular contract, and the facts surrounding the COVID-19 pandemic as it unfolds. Please contact a MacDonald Illig attorney so we can discuss your contractual issues and advise you on potential contractual defenses and actions you should take to preserve those defenses.