Our colleagues have discussed the application and interpretation of force majeure clauses in contracts related to COVID-19 disruptions. These clauses are included in a contract by the parties and spell out the circumstances under which performance will be excused during one of the specified circumstances, such as natural disaster, disease, epidemic, or pandemic.
But what happens when a contract contains no force majeure provision? The short answer is that courts look to common law principles developed over time. These principles include impossibility of performance, frustration of purpose, and impracticability of performance.
The principles behind the force majeure clause originated in England. In Taylor v. Caldwell,[i] an English court decided that circumstances beyond the control or fault of two contracting parties excused performance under their contract. An event organizer had contracted with a venue owner to rent a music hall and gardens for four days during the summer of 1861. The event organizer agreed to pay the venue operator a sum of money on the day of each event. Before the first event could take place, however, an accidental fire destroyed the music hall.
The parties’ contract did not include a clause governing such a situation. After evaluating the contract, the court determined the purpose of the contract was to permit the event organizer to use the music hall, an integral part of his summer events. Without the concert hall, the purpose of the contract was frustrated. Reviewing prior English cases, the court summarized the rule of law as follows: “[I]n contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.”[ii] Without the concert hall, the performance of both parties was excused.
Twenty years later the Supreme Court of the United States adopted the same rule of law. In an aptly-named case called The Tornado,[iii] the Supreme Court determined the owner of a ship named the Tornado was not required to deliver freight on his vessel as contemplated by a contract, because his ship had accidentally caught fire before the ship commenced voyage and was rendered unseaworthy. The ship owner and recipient of the ship’s freight had specifically agreed the Tornado would deliver the freight. Obviously, being rendered unseaworthy, the Tornado could no longer deliver the goods, but the parties had failed to include a clause in their contract governing this situation (as in Taylor v. Caldwell). The Supreme Court expressly adopted the rule in Taylor that, where the agreement of two contracting parties contemplate a specific set of circumstances that can no longer be performed, both parties are excused from performance.
American courts still apply this principle, although with some modifications.[iv] In essence, a party asserting the defense of impossibility of performance, impracticability of performance, and/or frustration of contractual purpose must establish the following: “(1) the unexpected occurrence of an intervening act, (2) such occurrence was of such a character that its non-occurrence was a basic assumption of the agreement of the parties, and (3) that occurrence made performance impracticable.”[v]
If a contract does not include a force majeure clause, the courts will apply the above common law principles first laid out in the English case of Taylor v. Caldwell (1863), adopted by the U.S. Supreme Court in The Tornado (1883), and modified by more recent decisions to determine whether COVID-19 related disruptions have resulted in the frustration of a contract’s purpose to the extent the parties to the contract are excused from performance. Whether a particular court adopts an impossibility of performance argument is highly fact-specific. We will evaluate impossibility of performance arguments in further detail in future articles.