In the era of the COVID-19 pandemic, it is not business as usual. As you evaluate your ability to fulfill existing contractual obligations and contemplate new contracts such as leases, supply agreements, and service contracts, an experienced transactional attorney can help protect you against the uncertainties you face.
Many well-drafted contracts contain “force majeure” provisions that allocate the risk of extraordinary events that make it impossible or impracticable to fulfill contractual obligations. The applicability of force majeure to your situation likely depends largely on the language of your contract.
Most force majeure provisions list a series of events excusing nonperformance due to circumstances beyond a party’s control including natural disasters, war, acts of terrorism, or other ‘acts of God.’ The party seeking to excuse its performance bears the burden of establishing that the event causing the nonperformance fits within the contract’s language. Regarding COVID-19, not all force majeure provisions explicitly include disease, epidemics, or pandemics. Thus, it is important to consult an experienced attorney to determine whether COVID-19 or the resulting shutdowns and restrictions trigger your force majeure provision.
Even if your contract does not contain a force majeure provision, relief may be available under the doctrines of impossibility of performance and frustration of purpose. Impossibility covers not only physical impossibility, but also extreme impracticability of performance. Sometimes, contracts contain explicit impossibility clauses in addition to, or in lieu of, force majeure provisions, though the common law doctrine still applies even if there is not an explicit clause. To invoke impossibility, performance must be “not merely difficult or relatively impossible, but absolutely impossible, owing to the act of God, the act of the law, or the loss or destruction of the subject-matter of the contract.” Ross Clinic, Inc. v. Tabion, 419 N.E.2d 219, 223 (Ind. Ct. App. 1981). COVID-19 would be considered a “supervening impossibility” that rendered performance impossible after the contract was formed.
Frustration of purpose occurs when performance remains possible, but an unforeseen change makes the deal virtually worthless to one party. To prove frustration of purpose, the contract must be in the midst of being performed, and the frustrated party’s purpose in making the contract must have been known to both parties when the contract was made such that both parties understood the transaction would make little sense without that purpose.
Drafting New Contracts
As the COVID-19 pandemic continues, you should proactively incorporate appropriate force majeure provisions into your contracts. While the essential force majeure events depend on the contract, you should consider:
- natural or man-made outbreaks of illness or disease, epidemics, or pandemics or any declarations of emergency regarding same from any health organization or any level of government;
- changes in the United States or global economy as a whole;
- changes in conditions affecting the industries in which the parties operate;
- changes in financial, banking or securities markets, including any disruption thereof, declines in securities or market indexes, or change in prevailing interest rates; and
- supply disruptions, work stoppages, or governmentally imposed quarantines and travel restrictions.
If you are experiencing business interruption or will be in the future, you should also have your insurance policies reviewed to determine whether they cover COVID-19 related losses. If your insurer or broker tells you there is no coverage, you should seek a second opinion.
The experienced transactional and coverage attorneys at Plews Shadley Racher & Braun are well-equipped to answer your contract and insurance questions. It is what we do every day.