Can't fulfill a contract due to COVID-19? Here's what to do | Duhon

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COVID-19, or the novel coronavirus, has and will continue to substantially impact our society, laws and economy. Social distancing, self-isolation, and other public health measures are necessary to protect ourselves, our loved ones, and our community from the impact of this deadly virus. But what about the impacts on business? What happens if a business can’t perform under a contract due to the effects of the coronavirus? Contracts can be unforgiving — failure to perform can result in substantial liability. But there is hope: The law has options that may excuse a business’s failure to satisfy their obligations under a contract as the result of the coronavirus. Two of these options are the doctrines of force majeure and commercial impracticability.

Force majeure

Force majeure refers to a contract clause that allows a party to avoid performing their contractual obligations when an “act of God” — or a similarly extreme event — prevents performance. Not every agreement has a force majeure clause, but force majeure clauses typically include a list of scenarios followed by a general catchall statement. Force majeure clauses will vary, but usually look something like: “If either party’s performance of any obligation under this Agreement is prevented as a result of strikes, restrictive governmental laws or regulations, war, act of God, or other reason whether of a like nature or not that is beyond the control of the party affected, then such performance shall be excused.”

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Historically, courts will only apply a force majeure clause to excuse a breach of contract for nonperformance, if the reason the party couldn’t satisfy their obligation under the contract is listed in the force majeure clause. Rarely is an obligation to pay money excused, but courts often will excuse other obligations, like performing a service. Unfortunately, many force majeure clauses do not include “pandemic” or things that have resulted from the pandemic, like self-isolation. So, an affected business would have to rely on the catchall term of the clause. 

Using the above example clause, the question would be whether the failure to perform is caused by a reason “beyond the control of the party affected.” We expect that courts are going to provide some latitude to businesses that are substantially impacted by COVID-19, but businesses should make good faith efforts to perform or at least analyze possible methods to see if they reasonably could perform. If a lawsuit ensued for failure to perform, that analysis could prove invaluable.

Commercial impracticability

On the other hand, the doctrine of impracticability also excuses nonperformance, but does not rely on the language of the contract. Unless the contract states otherwise, impracticability applies where an unforeseeable circumstance makes performing contractual obligations unexpectedly impractical and performance becomes nearly impossible as a result.

These unforeseeable circumstances are traditionally death or incapacity of the person necessary for performance, destruction of a specific thing necessary for performance, or when a prohibition or prevention by law is later put into place. However, this list is not exhaustive. Other circumstances such as acts of God or acts of third persons also have been considered circumstances that excuse nonperformance under the doctrine. Shifts in market conditions or financial ability are not circumstances that justify excusing nonperformance.

Importantly, nonperformance is not excused where performance merely becomes expensive or unprofitable. Instead, performance must become so burdensome that it is unjust to require the party to perform. Just as with a force majeure clause, businesses should carefully analyze just how difficult performance would become. For example, if goods were not available from an Italian supplier, but were available at a higher price from a Swiss supplier, the amount of the difference in price is critical to determine whether the difference is enough to make performance impractical. 

The coronavirus is unprecedented in our lifetimes. Its widespread impact and effect on businesses, such as forced shutdowns and shelter-in-place regulations, have yet to be tested in a modern American court where little guidance exists from the outbreaks of Spanish flu, SARS, Ebola and the like. While we anticipate courts may be more lenient toward nonperformance in the months and years to follow our victory over the coronavirus, there is no single answer or solution.

Businesses should review their contracts and situation carefully, consult with an attorney for guidance on any action or inaction it may take, and consider working with the other party to reach an agreement that is mutually beneficial before a breach occurs.