Prior to the pandemic, the question of whether a contract could be avoided based on force majeure or impossibility of performance was rarely raised. It was a relatively esoteric area of law that many lawyers had not dealt with since law school. However, over the last two months, questions of force majeure, as well as impossibility of performance, are the new hot topic. Whether the business is a restaurant, hotel, or event planner, circumstances have changed dramatically in a short time and many are looking at whether there is any room to adjust their contractual obligations.
A. What is Force Majeure?
Force majeure, which is French for “superior force”, sometimes also known as Act of God, is a doctrine that essentially frees both parties from liability or obligation to perform when an extraordinary event or circumstance beyond the control of the parties occurs, such as a war, natural disaster, or a pandemic.
A force majeure clause contained in a contract would generally describe the situations that excuse performance. In such situations, the scope of this clause is a matter of contract interpretation. Typically, a force majeure clauses would list the specific types of events that would alter the parties’ responsibilities, such as hurricanes, war, civil disturbances, etc. Or, the contract may contain a clause that identifies that types of events that will not excuse performance. During the last several weeks, many companies are evaluating these clauses to see whether the word “pandemic” is mentioned.
The difficulty arises when the contract contains no such force majeure clauses and the parties are left to rely on implied doctrines which address situation where contractual performance is impossible, impractical or at least economically infeasible.
B. Impossibility and Impracticability of Performance
Contract law generally accommodates situations in which one party’s contractual performance is made impossible or impractical by intervening and unforeseeable events, such as the outbreak of a war or a similar catastrophic event. The law recognizes that it would be unfair and inequitable to hold a contracting party to its contractual duties when the circumstances interfering with performance are extraordinary and beyond their control.
California Civil Code section 1511 states that: “The want of performance of an obligation, or of an offer of performance, in whole or in part, or any delay therein, is excused by the following causes, to the extent to which they operate: (2) When it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.” There are similar laws in other states.
Issues arise as to whether the unforeseen event will simply cause delay, or excuse performance entirely. For example, a hurricane might delay performance of a lumber supply contract by a few days or weeks, while the same hurricane may excuse performance of a contract to supply rarely blooming flowers.
If the contract contains a time is of the essence clause, then a delay in performance may morph into an excused performance, insofar as the window in which to perform one’s obligations is small. Further, in contracts without a time of the essence clause, by the time the unforeseen event is over, conditions may have changed significantly, such that performance is excused. For example, in Autry v. Republic Productions, 30 Cal. 2d 144 (1947), the court excused Gene Autry from an obligation to act in movies when he was drafted into the armed forces. The passage of time was viewed to constitute a significant change in circumstances, since Autry’s ability to perform had changed.
The event which excuses performance must be unforeseen when the contract is entered into. Therefore, in the present circumstances a contract that states that it was entered into in mid to late March 2020, after COVID19 began to spread widely, may not provide leeway to claim that obligations should be cancelled due to unforeseen current events. In Mitchell v. Ceazan Tires, Ltd, 25 Cal. 2d 45 (1944), which was another case triggered by the outbreak of war, a tenant which had leased commercial space for an auto parts and tire store contended that the war triggered governmental regulations on the sale of new tires making performance impossible. The California Supreme Court rejected this argument, not only because the contract was entered into when the country was debating entry into the war, making this not entirely an unforeseeable or remote possibility, but also because the contract still retained value notwithstanding the limitation.
In the context of COVID19, anyone who has entered into a contract during the last two months, would have difficulty avoiding performance by claiming the advent of unforeseen events. However, a contract that is impacted by unforeseen regulations enacted as a result of COVID19 may yield a different result.
C. Frustration of Purpose
This frustration of purpose doctrine may be invoked where performance is not impossible but, due to the significant change in circumstances, a basic assumption in the parties’ agreement has not materialized.
For example, a company has a contract obligating it to provide ancillary services at a major trade show that is now canceled due to COVID19. The vendor can still perform the services (hence, not impossible), but the entire point of the transaction was that there would be thousands of attendees at the event. In this instance, frustration of purpose, not impossibility of performance, is a better argument. However, frustration of purpose would not apply to a contract to pay for goods or services previously supplied, such as an automobile loan or a construction contract.
In examining one’s rights and obligations under these doctrines, the key questions are:
1. Does the contract contain a force majeure clause? If so, that clause will be of primary importance in determining one’s rights.
2. If impossibility of performance is the issue, one must ask whether the disruption caused by COVID19 was foreseeable when the contract was executed. This will be a difficult burden for contracts entered into recently.
3. How close is the nexus between the claimed performance and the pandemic? In order to avoid an obligation, one will have to show that something changed the equation, as it does in contracts involving services for large events.
4. Does the pandemic merely make the contract more difficult to perform, rather than rising to the level of impossibility?
5. Is a delay in performance rather than a suspension of the entire contract merited? As businesses begin to reopen across the country, a mere delay in performance may be the best option for all parties to an agreement.