Performance May Not Be Required: How the Coronavirus Impacts Your Contract
By: Lauren Marsicano
Insta: @networkingmaverick
Performance May Note Be Required: How the Coronavirus Impacts your Contract.
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During the last few weeks, we have seen the Coronavirus go from “bad flu” to worldwide pandemic causing the cancellation of major sporting and music events worldwide. On March 11, 2020, the World Health Organization declared the COVID-19 (Coronavirus) an official pandemic, and President Donald Trump declared it a national emergency a few days later, after many states had already done so. Because of such designations at the local, national, and worldwide levels, many businesses have been given directions to cease activities and recommendations to the average citizen if affected areas are to begin what is called “social distancing.” These actions have created a global disruptions (and mass panic) that prevents or makes it impracticable for many businesses and people to honor their contracts. What can you do if you can no longer perform your obligations in light of this public health emergency? Are you still required to host that event or provide the contracted service? Because of this global outbreak and the state of affairs, you may have three potential ways to excuse nonperformance of your obligations: 1) Impossibility, or as it’s more commonly known, Impracticability, (2) Frustration of Purpose, and/or 3) A Force Majeure Clause.
1) Impossibility/Impracticability
The first on the list is actually a common law gap-filler for all contracts (meaning it is not written into the agreement itself but is an argument that can be used and followed by the courts). Impossibility used to mean that party’s performance was literally impossible. For instance, the case most cited is where the owner of a music hall was excused of liability for failing to make the hall available due to an accidental fire that destroyed the building. However, the common law doctrine has loosened up and no longer requires complete impossibility, but performance must be impracticable. Impracticability is essentially when a party is excused of its responsibilities because performance has been made excessively burdensome, or impracticable, by a supervening event that was not caused by the party seeking to be excused (for instance, the owner didn’t burn down his own music hall) and that is inconsistent with the basic assumption of the parties at the time the contract was made (i.e. both parties expected there to be a music hall to host the event). The supervening event must be unforeseeable (but not inconceivable) to the point that it is so unlikely that a reasonable party would not have guarded against it specifically in the contract. For instance, accidental fires do happen, but you don’t usually foresee accidental fires before they take place.
Because of the outbreak, airlines have stopped flying to certain countries, the U.S. has now banned foreigners from all travel into the U.S. from Europe and other countries, and many states have issued guidance to cancel large gatherings and stay indoors (or what is being called “social distancing”). Such a large-scale incident or event was arguably unforeseeable and not caused by you, so if you now find yourself unable to perform on a contract because of it, you can argue the common law doctrine of Impossibility/Impracticability to get out of performing the contract. The second reason you may be excused from performance, frustration of purpose, is also a gap-filler common law doctrine.
2) Frustration of Purpose
Frustration of purpose focuses on the parties’ purpose in making their contract and has nothing to do with a party’s inability to perform. It applies where a supervening event fundamentally changes the nature of a contract and makes one party’s performance worthless to the other. The best example is the landmark case of Krell v. Henry. In this case, Henry rented a room from Krell for the purpose of viewing the coronation of King Edward VII. Unfortunately, the King fell ill, and the coronation was postponed. The very purpose of the contract, a room with a view of the coronation, was frustrated, or no longer happening, so performance was excused.
For your purposes, many artists or businesses are now unable to travel or enter the country and almost all professional sporting events have been cancelled (like the NBA and NHL) along with major music conferences (like Ultra Music Festival). If you were renting a room for these events and both parties knew that this was the purpose of the contract, then it is likely that performance of either party is now excused as the very purpose of the contract has been frustrated and no longer taking place. Again, the focus is on the parties’ purpose in entering the contract, and if that purpose no longer exists making any party’s performance worthless, then you may be able to avoid performing under the contract due to frustration of purpose. Although the first two reasons discussed are common law principles not contained in writing in the contract itself, the last way you may be able to avoid performing under a contract due to the outbreak is if your contract contains a force majeure clause.
3) A Force Majeure Clause
Generally, a force majeure clause in a contract excuses contractual nonperformance when unforeseeable circumstances prevent someone from fulfilling its obligations in a contract. It is important to note that the protections of the two gap-filler doctrines described above can be lost by contractual provisions, like a force majeure clause. This is because courts have found that such provisions supersede the common law doctrines, and if the parties have already discussed and assigned the risks, then the courts will not interfere with such agreement by the parties.
If your contract contains a force majeure provision, then it is likely that the Coronavirus and national health emergency fall within that clause, depending on its wording. Many force majeure clauses reference broader categories that qualify as force majeure events and, thus, excuse nonperformance. Such broad categories include “acts of God,” “acts of government,” or “other circumstances beyond the parties’ reasonable control.” Because the virus itself is a naturally occurring component combined with the government actions like quarantines and other mandated measures for controlling the outbreak, the outbreak may be an event within the broad categories of the force majeure clause. Many force majeure provisions even contain specific events like “epidemic” or “pandemic” or “natural disasters” that would apply to the current situation even more specifically. However, if your force majeure clause begins listing specific events (that does not include anything like an epidemic or pandemic) and then has a general catchall at the end, a court interpreting the clause might limit its interpretation by invoking the rule of ejusdem generis. Essentially, this rule means that a court will narrowly construe the catchall to include only event or things of the same general nature as those specifically listed at before the catchall itself. If your force majeure clause doesn’t have this issue, then be sure to follow the notice requirement to give notice to the other party that you are seeking to avoid performance by invoking the force majeure clause due to the recent outbreak and national health emergency.
Once you’ve looked over your contract again, think about the three possibilities above and if you fit into any of them. If your contract has a force majeure clause, start there. If not, decide whether the outbreak has made your performance impracticable or possibly made the purpose of the contract nonexistent. At the very least, reach out to the other party to see if they may agree to postpone the performance. In many cases, they may have been benefitting from a high turnout at an event or perhaps they also felt like they couldn’t perform their end of the bargain. Simple communication and empathy can go a long way to avoiding potential litigation issues. But, if in the end you still need to unilaterally break the agreement, hopefully you have a better understanding of the risks involved and if you have any arguments based upon the reasons discussed above to excuse your nonperformance.
For questions, contact business attorney Lauren Marsicano at LM@MLesquire.com
*This article is being offered for educational purposes only and is not legal advice. No attorney-client relationship has been formed, and you should always consult an attorney to discuss your unique situation.