Law In The Time of Coronavirus*
This too shall pass and before long many of us will be back in courtrooms arguing our clients’ causes. As is true in every crisis, cases of contractual defaults will greatly increase and lawyers will be tasked with formulating legal theories to support (or oppose) companies’ nonperformance of their contractual obligations. As is also the case in such environment, common-law doctrines that justify nonperformance of contractual obligations will take center stage in legal briefs and arguments.
This is a brief overview of the primary theories under American common law that may justify nonperformance of contractual obligations in extraordinary situations such as the one in which we find ourselves.
Force majeure clauses excuse contractual nonperformance when it is caused by unforeseen events beyond the control of both parties. It is sometimes referred to as “Acts of God.” The doctrine generally applies to natural events such as floods, tornadoes, earthquakes and hurricanes, as well as acts of people and governments such as terrorism, riots, strikes, wars and epidemics.
If the contract expressly provides for an epidemic or pandemic as a force majeure event, this makes the argument justifying nonperformance fairly strong. Most contracts, however, do not expressly include pandemics or epidemics (no doubt they will going forward) as a force majeure event, in which case lawyers will need to rely on the catchall language that most force majeure clauses contain, such as “other circumstances beyond the parties’ reasonable control.” Some courts, however, will construe such catchall language narrowly to include only events or things of the same general nature of class as those specifically listed in the provision. Others will be more generous. Much will depend on the jurisdiction you are in.
To invoke a force majeure clause, a direct causal link must exist between the force majeure event and the party’s non-performance. There is also a requirement that the party affected by the force majeure event take reasonable steps to mitigate its damages.
A successful application of a force majeure clause will excuse the party from its contractual obligations for as long as the event continues. In some circumstances, where delay in performance undercuts the very essence of the contract, the contract may be terminated altogether.
Coronavirus will likely satisfy force majeure requirements under most contracts that contain the clause. The current crisis contains two types of unforeseen events that are commonly covered by force majeure clauses: those that occur naturally (i.e., the virus), and those caused by governmental actions (i.e., travel restrictions, business closures, quarantines, etc.). Either one would likely be sufficient for a successful invocation of a force majeure clause.
Contracts Without Force Majeure Clauses
For contracts that do not contain force majeure clauses, the common-law doctrines of frustration of purpose, impossibility of performance and impracticality may be available to justify contractual nonperformance. These exist in some form in most U.S. states, but the standards and their applications do vary from jurisdiction to jurisdiction, so care must be taken to research the applicable state’s law.
The frustration of purpose doctrine can be invoked when, as the name suggests, the contract’s very purpose has been thoroughly frustrated by an unforeseen event. It applies when, in the words of one New York court, the “frustrated purpose is so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.”
In the words of one treatise: “[w]here, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or circumstances [of the contract] indicate the contrary.”
If frustration of purpose is successfully invoked, the contract would be terminated or suspended.
Impossibility of performance is related to frustration of purpose, with a somewhat different emphasis: foreseeability. According to one New York court, under the doctrine of impossibility, “performance of a contract will be excused if such performance is rendered impossible by intervening governmental activities, but only if those activities are unforeseeable.” “A party seeking to rescind a contract must show that the intervening act was unforeseeable, even if the intervening act consisted of the actions of a governmental entity or the passage of new legislation.”
As a general rule, arguments of impossibility rarely make it past the initial stage in litigation. This is because demonstrating absolute impossibility and absolute unforeseeability is conceptually no easy matter. However, the current situation may well provide an exception to the general rule. I anticipate that courts will be more open to arguments of impossibility in circumstances where, to take one example, the contract requires international travel at a time when it has been suspended by governmental decree.
The doctrine of impracticability may be applied to situations where the performance of the contract has been rendered unfeasible by events that neither party had anticipated. Under the Uniform Commercial Code, for example, a party wishing to be excused from performance under a theory of impracticability must demonstrate that performance “has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.”
All three doctrines are related in their essential elements, but each has evolved on its own in each jurisdiction that recognizes it. Courts have put their own glosses on the standards that would need to be satisfied to successfully invoke the doctrine. Some of the doctrines are more developed in certain states than in others. It is essential that the standard applicable in your jurisdiction be thoroughly researched before deciding whether to invoke the particular doctrine.
* With apologies to Gabriel García Márquez