During this time of uncertainty, several of our clients have asked us to help assess their contracts including whether or not they may be terminable or modifiable based on COVID-19 issues including clauses related to force majeure, termination for convenience, impossibility of performance and governing law clauses within their contracts. Some of the more common questions have been related to: force majeure; governing law; the sale of goods; services and other contracts; impossibility and impracticality; and frustration of purpose.
Responsive measures likely will escalate as a result of COVID-19 and may hinder (or preclude) your company from performing its contractual obligations. Parties without a contractual force majeure clause should carefully consider the factual scenario when deciding whether COVID-19 renders performance impossible or impracticable. Alternatively, frustration of purpose may apply when the specific purpose for which a contract was entered is rendered virtually worthless as a result of the outbreak. If your company is faced with the possible inability to perform its contractual obligations due to COVID-19, seek the advice of counsel now—before the date of potential breach occurs—and discuss whether the above legal defenses excusing performance may apply. To avoid waiving these defenses, certain notices should be sent before the date performance is due.
Here is a bit more detail on each of the specific questions we have been fielding:
One of the first items you should look for in reviewing your contracts is if there is a specific force majeure clause in the body of the contract. Specially you should examine:
- Which of my contracts allow either party to invoke force majeure and are there alternatives if there is not a specific force majeure clause?
- Does COVID-19 qualify as a force majeure event?
- Do the steps that federal and state government is taking qualify as a force majeure event?
- What are the notification requirements, and related rights and obligations?
When looking at your obligations under your contract one of the first determinations is what law governs the contract? If you are operating under a contract governed by United States law, the first place to look for the answer is within the four corners of the contract document itself. You need to also keep in mind that the law may vary state to state. Most contracts contain a choice of law provision so knowing which state law governs is critical. Specifically, check your contracts to determine whether there is force majeure, termination for convenience or other impossibility of performance-type clauses. If not, are you out of luck? The answer differs depending on the subject matter of the contract.
The Sale of Goods
If your contract relates to the sale of goods, then Section 2-615 the Uniform Commercial Code (“U.C.C.”), may provide your company with force-majeure type protection. The U.C.C. allows a seller to raise impracticability as a defense in a sales contract. Generally, a party asserting the impracticability defense must prove: 1) that an unforeseeable event occurred; 2) the nonoccurrence of the event was a basic assumption underlying the agreement; and 3) the event rendered performance impracticable. Thus, you would need to argue that COVID-19 satisfies these requirements. Obviously, there is no law on the specific application of this to COVID-19 issues, but they may apply in some instances.
Service and Other Contracts Not Related to the Sale of Goods
But what if your contract relates to services or other subject matters not related to the sale of goods, and therefore the U.C.C. does not apply? Is a force-majeure type defense available, even if there is no written clause in your contract? The short answer is maybe. Most states recognize the common law doctrines of impossibility, impracticability, or frustration of purpose as ways to excuse non-performance in limited circumstances. However, these doctrines are often difficult to establish and vary by state.
Impossibility and Impracticability
With no force majeure clause in place, your company may rely on the doctrine of impossibility, albeit the standard is high. Impossibility generally requires the destruction of the contract’s subject matter or when performance is objectively impossible due to an unanticipated, unforeseen event that was not contemplated by the parties. Different states take different views of this issue so the governing law of your contract will matter. In Ohio, the standard is that “application of [the impossibility] doctrine can allow any party to void the contract when government activity renders performance impossible or illegal. Michigan and California, however, have expanded the doctrine to include not only instances of strict impossibility but also when performance would be impracticable—an easier standard to establish. Impracticability may excuse performance when a party can prove that the performance would be unreasonably difficult, expensive, or when injury or loss is involved.
Frustration of Purpose
In addition, your company also may be able to rely on the related doctrine of frustration of purpose when a contract governed by common law does not contain a force majeure clause. The doctrine is sparingly applied and is also difficult to prove. In Michigan for instance, the doctrine generally requires an unforeseen change in circumstances that makes one party’s performance virtually worthless to the other, thus frustrating the very purpose in making the contract. The key difference between impossibility and frustration of purpose is that the latter requires a change in circumstance that rendered the contract pointless for both parties. The doctrine is similarly applied in California and New York. In Texas, however, while frustration of purpose may be referenced by this name, there is no functional distinction between it and the doctrine of impossibility as discussed above.
If you have any questions about a contractual obligation or any other issue that has arisen as a result of the COVID-19 outbreak please contact your attorney at Carlile Patchen & Murphy LLP or any member of the Business Law Group.