The world has seen a dramatic change with the global spread of the Coronavirus (Covid-19). Never in modern history has an event had such an immediate and profound impact on both people and commerce. Understandably, the primary focus of government has been to protect the public from the further spread of the virus while focusing all available resources on providing treatment to those who have contracted the potentially fatal illness. Forced closings of businesses and restrictions on travel have impacted virtually every person and business in the country.
Like all catastrophes, the Coronavirus pandemic will pass, and once it does, there will be a myriad of legal issues associated with the resumption of the national economy. Although there are legal historical precedents involving unpredictable events such as storms, hurricanes, wars, strikes, etc., it is almost certain that the current crisis will result in new and novel interpretations of contract provisions and the legal obligations arising under those contracts. It is likely that there will be significant tort litigation particularly against facilities such as senior healthcare and assisted living facilities where large numbers of deaths resulted from rapid spreading of the virus among those most likely to suffer the most serious consequences of the disease.
It is impossible at this time to accurately predict how courts will deal with contract and tort litigation impacted by the pandemic. Many contracts, including commercial purchase agreements and leases, contain what is known as a “Force Majeure” clause which is a provision in a contract which allows both parties to delay or eliminate performance where specified circumstances outside the control of the parties occur. A “force majeure” generally means an act of God or of nature, a superior or overpowering force or an event or effect that cannot reasonably be anticipated or controlled. These clauses are designed to excuse an innocent party’s partial performance or failure to perform under the contract in cases of natural emergencies or “acts of God,” such as earthquakes or floods. Although included in many contracts, Force Majeure clauses generally are included as boilerplate language without any negotiation or much thought, and seldom are invoked or litigated. Most parties that sign a contract containing such a provision have no idea under what circumstances the provision excuses the performance of one or more of the parties. It is inevitable that going forward such clauses will be drafted with much more precision including defining what events trigger the provision and what how the parties responsibilities are amended or excused when such an event occurs.
Whether or not a party’s delay or lack of performance will be excused by a force majeure provision in a contract will depend on the wording of it and the particular circumstances or event allegedly outside of a party’s control – with the caveat that most force majeure clauses are narrowly construed by courts in many states. For example, contracts that include language like “pandemic,” “epidemic” or similar events rendering performance impossible would likely excuse a party’s performance due to Coronavirus.
Although global health emergencies and pandemics are generally an unexplored area of force majeure litigation, and are not expressly identified in most force majeure provisions, there may be language in the clause which provides relief in light of the other contractual terms, the surrounding circumstances and purpose of the contract. And even if the contract does contain a provision specifically titled “Force Majeure”, a party may still be able to evade contractual commitments under other doctrines such as impossibility or frustration of purpose.
A successful breach of contract defense under the doctrine of impossibility (or impracticability) of performance, excuses a party from having to perform its contract obligations where performance has become literally impossible, or at least extremely more difficult, because of the occurrence of a supervening event that was not within the original contemplation of the contracting parties. The supervening event must be one that had not been anticipated at the time the contract was created, and one that fundamentally alters the nature of the parties’ ongoing relationship.
The doctrine of frustration of purpose may also be available as a defense to an action for breach. Frustration of purpose arises when the contracting party’s performance can still be performed, but the supervening event fundamentally has changed the nature of the parties’ overall bargain. Relief from performance of contractual obligations pursuant to this theory are not lightly granted. The breaching party’s evidence of frustration must be, among other things, clear, convincing and adequate.
Given the ironically novel nature of the present “novel virus” and its impact on commerce, it is not possible to predict with certainty how a court will decide whether a party to a contract signed before the pandemic is excused from performance or entitled to such other relief as a delay or price adjustment. Given the cost of litigation, it is almost always better for the parties to negotiate an appropriate adjustment to the terms as opposed to filing a lawsuit.
One lesson that everyone has learned from the present pandemic is that such situations are likely to occur again in the future, and perhaps with even more devastating consequences. Therefore, it is important to discuss in advance what each parties’ expectations are if and when such an event occurs again and to make sure the parties expectations are addressed in the terms of the future agreement.
