In Dealing with Pandemic Issues Businesses Should Not Forget Basic Contract Principles
By: Robert W. Small
April 3, 2020 - 3:23 PM
It is to be expected that businesses are focused on the many federal and state laws enacted to deal with the COVID-19 pandemic. Those laws will not address or offer solutions for many problems. There are, however, some basic tenants of contract law that might extricate business from leases and contracts they no longer can perform. Conversely, businesses should plan for others with whom they have contacted to seek relief from those obligations. This Alert will address three aspects of contract law that might come into play on a widespread basis due to the pandemic.
Force Majeure Lease and Contract Clauses.
Force Majeure clauses are commonplace in commercial contracts and leases. Generally, they suspend, extend or excuse the performance of a lease or contract or some provisions of a lease or contract when circumstances beyond the parties’ control and that were not contemplated at the time of contracting render performance by one or both parties impracticable or impossible. Unless performance is fully excused, Force Majeure clauses excuse performance only for the period of the circumstances rendering performance impracticable.
Force Majeure clauses often contain limitations and obligations. For example, notice to other parties to the contract that such a clause is being invoked might be required, and failure to give timely notice can vitiate the right to invoke it. It is common, though not universal, that Force Majeure clause in commercial leases will exclude paying rent or a minimal rent from the scope of a Force Majeure clause. Additionally, the party invoking the clause may not be at fault for the circumstances giving rise to its use. Such clauses historically have been construed by courts narrowly to apply to only the events listed in the clause itself unless there is some “catch all” clause such as “and such other events as are beyond the parties’ control.”
To benefit from a Force Majeure clause, it must be shown that performance is not merely difficult or more expensive than anticipated but that, due to a Force Majeure event, the party cannot perform despite reasonable effort to do so. For example, if a party agrees to sell a stated number of surgical masks to a hospital for a stated amount and at the time performance is due the cost of the masks to the seller has greatly increased, that increase will not excuse performance absent a provision in the contract dealing with the seller’s costs. If, however, the seller agreed to sell N95 masks manufactured by 3M and no such masks are available due to an unanticipated demand due to a pandemic, a Force Majeure clause likely would be enforced.
The Doctrine of Impossibility
Closely allied to Force Majeure clauses is the court made doctrine of impossibility of performance. The doctrine excuses performance of a contract when unanticipated and supervening circumstances make performance impracticable. The doctrine is available even in the absence of a Force Majeure clause but otherwise is similar in its effect and prerequisites for application. Unlike a Force Majeure clause, however, its scope is not limited by what the parties agreed to as supporting events but is whatever a court deems supervening. The party seeking to assert the doctrine may not be at fault for its inability to perform and the circumstances on which the doctrine is asserted (i.e. the existence or non-existence of certain facts or circumstances) must have been assumed by all parties to the contract to be such that would not occur. That is, the facts or events giving rise to assertion of the doctrine must not have been reasonably foreseeable. As with a Force Majeure clause, it is not enough that performance be more difficult, more costly, or less profitable. There must be no objectively, commercially reasonable alternative form of performance.
The Doctrine of Frustration of Purpose
Frustration of purpose is another court made doctrine that can excuse performance of a contract when the contract’s purpose cannot be achieved; or, stated otherwise, when performance by one party is rendered worthless to the other party. The classic case which all lawyers read in law school involved a contract to rent a room on a certain date for the purpose of watching a coronation. The coronation was canceled, and the party renting the room was excused from having to pay for it because use of the room would have been useless for its intended purpose. It is clear from this that the purpose of the contractual undertaking is critical to the application of the doctrine. Furthermore, the frustration of purpose must be complete. If any benefit is or would be obtained by the party asserting the doctrine, it will not apply.
Those faced with leases, franchise agreements, and other forms of contracts whose ability to perform has been altered due to the pandemic, should consider if any of these contract principles will excuse or suspend performance. Similarly, parties to such agreements must consider these defenses being asserted to excuse performance.
If you have any questions, or would like additional information, please contact Bob Small, Partner in Reger Rizzo & Darnall’s Employment Practices Group, at 215.495.6541, or via email at firstname.lastname@example.org.
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