Getting out of a Contract Due to Coronavirus (Covid-19)
As the Coronavirus (Covid-19) pandemic runs its course, governments and businesses are reacting by restricting travel, cancelling events, and modifying supply chains. If you are a business owner or manager, you may have received calls from vendors or suppliers, informing you that they will not be able to perform according to the original terms of your agreement. You may also be looking at a contract that requires your business to do something that now seem impossible or unreasonable and you may be wondering whether you can get out of that contract because of the Coronavirus. This article will discuss potential legal grounds for excused performance due to the Coronavirus and considerations to help avoid a costly breach of contract lawsuit.
Many commercial contracts include a force majeureprovision, which excuses one or both parties from performing their duties under the contract in the event of certain types of “Force Majeure Events.” A standard force majeure provision may read:
No party shall be liable or responsible to the other party, nor be deemed to have defaulted under or breached this Agreement, for any failure or delay in fulfilling or performing any term of this Agreement, when and to the extent such failure or delay is caused by or results from acts beyond the impacted party's ("Impacted Party") reasonable control, including, without limitation, the following force majeure events ("Force Majeure Event(s)"): (a) acts of God; (b) flood, fire, earthquake, natural disaster, or explosion; (c) war, invasion, hostilities (whether war is declared or not), terrorist threats or acts, riot or other civil unrest; (d) government order or law; (e) actions, embargoes or blockades in effect on or after the date of this Agreement; (f) action by any governmental authority; (g) national or regional emergency; (h) strikes, labor stoppages or slowdowns or other industrial disturbances; and (i) other similar events beyond the reasonable control of the Impacted Party.
The events that qualify as “Force Majeure Events” will vary from contract to contract and it is important to read your contract carefully to see what may be listed as a Force Majeure Event. In the above example, epidemics, such as the Coronavirus, are not listed. However, some force majeure provisions do specifically include epidemics under the definition of Force Majeure Events, in which case, you may be excused from performing your contractual obligations if Coronavirus prevents you from doing so.
Looking again at the above example, Force Majeure Events includes “action by any governmental authority” and a “national or regional emergency.” Suppose that your business planned to host a convention in San Diego, California, and you have contracts with various vendors and clients. If San Diego County health officials revoke your permission to hold the event due to concerns over the Coronavirus, you may be able to rely on the “action by any governmental authority” to excuse you from your obligations under those contracts. Similarly, the Coronavirus could potentially be considered a “regional emergency” insofar as the State of California, County of San Diego, County of Los Angeles, and County of San Francisco have announced a State of Emergency.
Some contracts do not specifically set forth the events considered to be Force Majeure Events, or the contract includes a general definition of a Force Majeure Event, such as “an event beyond the reasonable control of the Impacted party.” The spread of the Coronavirus is, of course, outside the control of almost all businesses and therefore would fit within this definition. However, it is important to note that not all obligations are excused simply because a Force Majeure Event exists. The Force Majeure Event must actually cause your business to be unable to perform its duties under the contract.
Supervening Events – Impossibility, Impracticability, Frustration of Purpose
Where no force majeure provision exists, obligations under a contract may nonetheless be excused if an event occurs after the contract is made (a “supervening event”) and each of the following criteria is satisfied:
1. The purpose of the contract has been frustrated or the performance of the contractual duties has become impossible or impracticable.
2. The event occurred without the fault of either party (this will typically be true in the case of Coronavirus).
3. The event's non-occurrence was a basic assumption of the parties' agreement (also typically true in the case of Coronavirus).
4. The risk of an event was not allocated to either party (this will likely be true if the contract does not have a force majeure provision).
A party may be excused from performing its duties under a contract where the performance has become impossible. If, for example, you were contractually obligated to host an event at a particular location, but the venue has been shut down by governmental authorities, you may be excused from your duties to host the event at that particular location. Similarly, if you agreed to deliver a product to an international buyer on a particular day and all means of international shipment and travel have been suspended, you may be excused from your duties to deliver the product on that particular day. Note that the performance must actually be impossible, not merely inconvenient.
Similarly, a party may be excused from performing their duties under a contract where the performance has become commercially impracticable. Impracticability is rarely an effective excuse, but may be available where the cost of performance has become extremely excessive. In the example of a contract requiring the international shipment of goods, suppose that all commercial shipping was halted, but that individuals are still allowed to travel internationally by personal watercraft. It may be theoretically possible that you could pay a handful of individuals with small boats to transfer the goods and that the goods would in fact arrive according to the contract. However, the shipping costs may be hundreds of times greater than anticipated, which would likely be grounds for an impracticability excuse.
Frustration of Purpose
Frustration of purpose occurs where a party can still perform its duties under the contract, but the basic purpose for doing so no longer exists. For example, suppose that you rented space for a conference held in the United States, for the purpose of hosting and marketing to executives from various countries in Europe. Because of the Coronavirus, all travel to and from Europe is unexpectedly suspended. While your business could still theoretically rent the venue, the purpose for doing so (hosting and marketing to European executives) no longer exists. Thus, the purpose of the contract may have been frustrated.
During this unprecedented time, businesses are facing new and unpredictable challenges. If your business is a party to a contract that no longer seems appropriate due to the effects of the Coronavirus, it may be time to revisit the terms of the contract to determine whether your performance may be legally excused.
To learn more regarding contract interpretation, contract excuses, and the legal implications of the Coronavirus, please contact our office at (760) 239-0229 or email@example.com.
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