6 Key Questions to Assess Whether Contract Performance Is Excused
As the 2019 novel coronavirus spreads and greater numbers of people nationally and globally are infected with the COVID-19 illness, prudential measures and government-imposed restrictions will disrupt contractual performance in all sectors. Set forth below are the 6 key questions one should ask to assess whether and how performance under a contract may be excused in light of COVID-19 disruption. For a more detailed write-up regarding these and other considerations, please click below to download PDF.
1. Does my contract include a force majeure clause?
A force majeure clause operates to excuse or otherwise alter a party's performance obligations in the event of substantial and unexpected changes of circumstance that are beyond a party's control. These clauses appear in many contracts and may be titled "force majeure" or "acts of God," or otherwise contain language addressing how parties should proceed if an unanticipated event renders contract performance impossible.
If your contract contains a force majeure clause, Questions 2-3 below apply. Otherwise, proceed to Question 4, below.
2. Does the force majeure clause apply to disruptions caused by COVID-19?
This will depend on the language of your particular contract. Force majeure clauses come in many different forms. Some provide an exclusive list of events that constitute a force majeure that may excuse contract performance. Such delineated events may indirectly relate to COVID-19—e.g., defining a force majeure to include "national emergencies," "embargoes," or other "government orders." Other force majeure clauses include a list of events that expressly do not constitute a force majeure. Many force majeure clauses include somewhat broad, catch-all language that may be applicable to COVID-19 disruption, such as language that defines a force majeure to include "any other events or circumstances beyond the reasonable control of the party affected."
3. Does the contract expressly delineate additional requirements for invoking or addressing a force majeure?
Some force majeure clauses include specific notice or ongoing communication requirements with which a party invoking force majeure to excuse performance must abide. Additionally, force majeure clauses may impose requirements to mitigate or compensate the non-invoking party for damages that result from a force majeure invocation.
As questions 1-3 above make clear, the starting point for understanding the applicability of a force majeure clause is the specific language of the clause itself.
4. Does the COVID-19 disruption meet the criteria for excusing contract performance under the common law doctrines of impossibility, impracticability, or frustration of purpose?
This will depend on the law of the state that governs the contract. In many jurisdictions, even absent a force majeure clause, certain common law doctrines allow performance to be excused under certain circumstances. Although they are often stated as two distinct doctrines, in many jurisdictions the doctrines of impossibility and impracticability are treated indistinguishably. In short, if an unanticipated supervening event renders performance impossible (e.g., the subject matter of the agreement is destroyed) or impracticable (e.g., the cost of performance increases so substantially that performance would be economically senseless), the common law may allow a party's nonperformance to be excused.
The doctrine of frustration of purpose is distinct from, but related to, impossibility or impracticability. Under this doctrine, performance may be excused where one party's known principal purpose for entering into the contract has been obviated by an unexpected supervening event (e.g., if a party enters into a 5-year lease for the purpose of opening a store to sell a particular product, and subsequently the government (unexpectedly) passes a law that bans the sale of that product).
5. What is the governing law of the contract?
The law that governs the contract can be determinative in understanding whether and how a force majeure clause or the above-described common law doctrines may apply. Many contracts expressly state, in a choice-of-law provision, what body of law applies in interpreting the contract's terms (e.g., a provision might state that the contract is to be interpreted "according to the laws of the District of Columbia"). Absent such a choice-of-law provision, default rules exist to identify the governing law.
6. How are disputes resolved under the contract?
In many instances, parties will disagree regarding whether or how a force majeure clause or the common law doctrines of impossibility, impracticability, and frustration of purpose should apply to a supervening event that disrupts contract performance. Understanding how the contract requires the parties to resolve disputes is therefore very important.
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Because the interpretation of a force majeure clause and the understanding of the common law doctrines that may excuse performance depend on the language of the contract itself, as interpreted under the applicable governing law and in accordance with industry and trade practice, parties should consult with legal experts to best understand whether and how these clauses and common law doctrines may apply.