April 08, 2020

Contract Performance and Frustration in Coronavirus's New Normal

6 min

Venable recently hosted a panel presentation to provide a framework for analyzing how the COVID-19 pandemic might affect contract performance in key jurisdictions, especially where agreements are silent and common law principles will apply. The panelists included Venable attorneys Christopher O'Brien, Jennifer Bruton, Ed O'Toole, Ben Whitwell, and Melissa McLaughlin. Here are some of the key takeaways:

  1. Force Majeure Clauses. When looking at contract performance, it's important to consider whether the contract actually addresses force majeure events. If it does, then the exercise is to construe the language and intent of the parties. If the contract does not address force majeure events, then common law principles of impracticability, impossibility, and frustration may apply. There will also be mixed cases, where there is some mention of force majeure in the contract, but it may not clearly apply to the performance at issue.
  2. Unforeseen Events. One of the elements that will be considered by courts looking at existing contracts is whether COVID-19 is an unforeseen event. Going forward, however, no one will be able to say COVID-19 or pandemics, generally, are unforeseen events. Therefore, it is essential to specifically address the secondary effects of the pandemic, including government policies that could delay or excuse performance in contracts that are currently under negotiation or being drafted.
  3. General Principles of Contract Law (the New Normal). Contracts with force majeure provisions typically specify when contract performance will be excused. Parties can determine what events will excuse performance; whether all or only certain types of performance will be excused; whether force majeure events will negate the contract or just delay performance; and what kind of notice is required to invoke the clause. It's important to remember, however, that the force majeure event the party is relying on for non-performance must be beyond the parties' control. Finally, while the event needs to fit into one of the categories in the clause, if pandemics are not listed as a category, there may be categories related to government actions that could be invoked. There may be language in other parts of the contract that excuse performance as well.
  4. Common Law Doctrines. As stated above, if a contract does not have a force majeure clause, the common law doctrines of impossibility, impracticability, and frustration may be applied to excuse performance. In most jurisdictions, the doctrines share three main principles: both parties assumed the event would not occur; there is no fault by the non-performing party; and the non-performing party's duty to perform is excused unless contract language or circumstances indicate otherwise. It should be noted that invoking these doctrines purely due to economic disadvantage usually isn't successful, but that could change in the current circumstances.
  5. Delaware Law. A lot of companies are incorporated in Delaware, and therefore Delaware law can apply even when the parties are located in another state. To invoke impracticability in Delaware, the parties must have assumed the event wouldn't happen; that performance is not commercially practicable; and that the non-performing party did not agree to perform in spite of impracticability. Delaware's frustration doctrine requires that the contract's principal purpose is substantially frustrated, the event was unforeseen, and the non-performing party is not at fault.
  6. Real Estate Considerations. There are three major types of real estate agreements: purchase and sale agreements, loan documents, and leases. Most purchase and sale agreements that have already been executed may not have direct provisions that could be triggered by an event like COVID-19, but parties should consider exercising rights under feasibility. Loan documents typically don't give borrowers relief for force majeure events and may even trigger a default if they contain certain provisions, such as material adverse change clauses. Commercial leases, however, almost always address force majeure. While such force majeure provisions may offer an excuse for non-performance of non-monetary obligations, such as continuance of occupancy, they often expressly do not excuse non-payment of rent. Leases usually contain provisions addressing eminent domain and other government action. Depending on the contract language, the Restatement (Second) of Property, Landlord and Tenant, suggests that a tenant may be able to terminate a lease if the use of the property is frustrated by government action apart from a taking by eminent domain, and if the action was not reasonably foreseeable. However, the doctrine is applied sparingly, usually only when the continuation of the lease would impose extreme hardship on the tenant and would not apply if the tenant can use the property for other purposes.  
  7. Seeking Resolutions Outside of Court. Regardless of jurisdiction, in the context of COVID-19, it's important to consider that these common law doctrines allow courts and arbitrators considerable flexibility in applying equitable principles. To be successful in court therefore, parties must demonstrate that they are being reasonable and making every effort to perform. (Parties who have partially performed will be likely looked on more favorably than parties who have simply walked away.) Even if litigation is ultimately necessary, parties will be encouraged to come up with interim solutions. Before rushing to court, parties should make every attempt to reach a commercial resolution.
  8. 9/11 and Force Majeure Clauses. Similar to COVID-19, 9/11 disrupted many commercial activities in the New York area and beyond. The following decisions provide useful contexts for what we are currently experiencing.
    • Bush v. Protravel International, Inc. Bush involved a woman who had signed up for an expensive safari in Africa that was set to begin on November 14, 2001. The contract had no force majeure provision and required cancellation by September 14, 2001, otherwise the consumer would lose her deposit. When 9/11 hit, the consumer was stuck on Staten Island with no phone service for many days and was unable to cancel the trip before the September 14 date. Despite the unforeseen circumstances, the tour operator refused to return her deposit, and the consumer sued in civil court. Even though there was no force majeure provision, the judge ruled in the consumer's favor on grounds of impossibility and issued a lengthy opinion, noting that "precedent is plentiful that contractual performance is excused when unforeseeable government actions make such performance objectively impossible."
    • OWBR LLC v. Clear Channel Communications. Clear Channel, a communications company, had signed a contract for a major conference at a Hawaiian resort scheduled for February 2002. The contract had a liquidated damages provision that stated if cancellation occurred within 30 days of the group's scheduled arrival, liquidated damages in the amount of 100% of room revenue plus taxes would be due. Clear Channel waited several months before canceling the event, however, perhaps because the contract's force majeure provision provided a potential loophole to cancel late due to economic inadvisability. The court found, however, that while the force majeure provision potentially gave Clear Channel an out, four months had passed since 9/11 before the cancellation occurred, and simple economic hardship did not qualify as inadvisable performance.

As noted above, courts grappling with a pandemic that causes major global upheaval will bend over backwards to be equitable when they can. Predicting litigation outcomes in our current circumstances is extremely difficult; therefore all parties should do their utmost to be reasonable and to work out commercial resolutions.

Want to learn more? View the full webinar or find additional alerts, news, and resources at Venable.com/COVID-19.