Enforceability of contracts during COVID-19: A litigator’s perspective
As COVID-19 continues to disrupt businesses and the economy, parties to a myriad of contracts are wondering: are contractual obligations enforceable even though performance is difficult, impracticable, or nearly impossible? Of course, every agreement must be evaluated independently. Generally speaking, however, issues that may surface in litigation concerning enforceability of contractual obligations during the COVID-19 pandemic may include force majeure clauses and certain types of common law defenses, such as impossibility, impracticability, frustration of purpose, and mutual mistake.
Most agreements contain force majeure clauses. A force majeure clause in a contract defines the scope of unforeseeable events that might excuse nonperformance by a party. The party seeking to invoke a force majeure clause to excuse nonperformance will have the burden of proving that the event was beyond the party’s control and without its fault or negligence. Force majeure clauses generally are included in contracts to provide flexibility for uncertainty. However, mistaken assumptions about future events or worsening economic conditions usually do not qualify as a force majeure.
As a general matter, the four-corners rule applies to contracts, where courts are supposed to enforce clear and unambiguous terms without resorting to parol or other evidence outside the contract. Given the current COVID-19 emergency, a court may excuse nonperformance pursuant to a force majeure clause that expressly contains “pandemic” or “national emergency.” In the event a force majeure clause does not contain the word “pandemic” or “national emergency,” parties may seek to introduce extrinsic evidence to clarify an alleged ambiguity.
The absence of a definition of a term in a contract does not necessarily render it ambiguous, and the language contained in a contract does not become ambiguous simply because operation of the agreement will work a hardship upon the party seeking to excuse nonperformance. On the other hand, in interpreting a contract, typically the contract’s words are given their ordinary meaning unless that will result in manifest absurdity or unless some other meaning is clearly intended from the face or overall contents of the instrument.
If a force majeure clause is deemed ambiguous relative to inclusion of a pandemic to excuse nonperformance, a court then would be permitted to consider the parties’ practical construction of an agreement. Aiding courts in interpreting the parties’ intent relative to ambiguous terms is the rule of “ejusdem generis,” which means that, where general words are followed by words of a particular and specific meaning, such general words are to be limited to embrace those items of the same general kind or class as the one specifically mentioned. In other words, if parties intended that general terms were to apply unrestricted, they would not have included the specific terms or classes. When applying this rule of interpretation, contract terms that follow an enumeration of specific terms are to be construed with reference only to the specific terms. If a force majeure clause contains a general phrase, such as, “Acts of God,” which is then followed by specific enumerations of the meaning of “Acts of God,” then the general phrase, “Acts of God,” may then be interpreted more narrowly to encompass those specific terms used to define “Acts of God.” For example, it could be argued that the parties did not intend pandemics to excuse nonperformance in the following force majeure clause: “Acts of God, such as hurricanes, tornadoes, earthquakes, and floods.” Furthermore, the nonperformance of a contract usually must be due to an event of nature that renders performance impossible. The happening of an event or its consequences generally must be outside the range of events on which the parties have conditioned performance of their agreement.
Ultimately, courts may lean towards being compassionate regarding nonperformance of obligations under a contract due to COVID-19; however, whether courts can exercise compassion in excusing nonperformance of contractual obligations involves evaluation of the specific force majeure clause at issue in addition to complex analysis of applicable law regarding contract interpretation.
Impossibility of performance occurs when, after the contract is entered into, an unforeseen event arises rendering impossible the performance of one of the contracting parties. However, a contracting party typically will not be excused from performance merely because performance may prove difficult, dangerous, or burdensome. The fact that a new law, whether foreseeable or not, makes performance under a contract more difficult or burdensome, as distinguished from impossible, is usually not a defense in an action for breach of contract. For example, the defense of impossibility generally cannot be based upon poor weather conditions.
Whether the defense of impossibility applies must be evaluated on a case-by-case basis. If COVID-19, through, for example, “Stay Home” Orders or through issuance of a state or national emergency, renders performance impossible, then a party’s nonperformance under a contract may be excused.
The doctrine of impracticability exists when, after a contract is made, a party’s performance is made impracticable without its fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made. If a contract is deemed impracticable, the duty to render performance may be discharged, unless the language in the contract or the circumstances provide for the inverse. The doctrine of impracticability generally is applied to the following three circumstances: intervening death or incapacity of a person necessary for performance; intervening destruction of a specific thing necessary for performance; and intervening prohibition or prevention by law. Nevertheless, impracticability is regarded as a broad principle and can be applied to a variety of circumstances and scenarios. Events that give rise to this defense generally are due to “Acts of God” or acts of third parties. There are circumstances where performance may be impracticable due to unreasonable difficulty, expense, injury, or loss to one of the parties to the contract. Performance may also be deemed impracticable because it will involve a risk of injury to person or to property, of one of the parties or of others, that is disproportionate to the ends to be attained by performance. However, “impracticability” means more than “impracticality.” A mere change in the degree of difficulty or expense due to such causes as increased wages, prices of raw materials, or costs of construction, unless well beyond the normal range, does not amount to impracticability.
Due to increasing death and individuals placed in critical care as a result of COVID-19 infections, a party seeking to excuse nonperformance based upon impracticability may argue that performance under the contract is outweighed by unreasonable risk of injury and death if the underlying performance at issue triggers such health risks.
Frustration of Purpose
The doctrine of frustration of purpose exists when, after a contract is made, a party’s principal purpose is substantially frustrated without its fault by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made. If that exists, a party’s remaining duties to render performance may be discharged unless the terms in the underlying contract are interpreted to prevent a discharge of duties based upon frustration of purpose. To that end, if a court strictly construes a force majeure clause such that the court finds it does not encompass the circumstances at issue, then frustration of purpose may not be a viable defense. The frustration of purpose defense also generally cannot be based upon the assumption of a continuation of existing market conditions and that a change in such conditions frustrated the purpose of the contract. That is because such unforeseen events typically are not deemed “substantial” such that a party’s obligations under a contract are excused. Otherwise, parties could attempt to avoid contractual obligations in almost all circumstances, which could create unintended consequences and potentially violate long-standing law mandating that parties be bound by their agreements.
Obstacles to a party seeking to excuse nonperformance of a contract based upon issues related to COVID-19 could be: 1) whether the purpose of the contract is actually frustrated or, alternatively, whether the contract has become economically less attractive; and 2) whether the COVID-19 pandemic is substantial enough to excuse nonperformance.
To be “mutual,” a mistake must be the mistake of both parties; it does not exist where one party insists that the contract expresses the entire agreement of the parties while the other party claims that not all terms agreed to by the parties were included in the written contract. A mutual mistake of fact can result in a lack of a meeting of the minds and could call into question the very existence of the contract. A mutual mistake of fact typically is present where a mistake by both parties as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances. The rule of mutual mistake can apply when the parties are mistaken as to a vital existing fact at the time of contracting. A mistake generally is regarded by courts as “material,” for purposes of rescission of a contract based on mutual mistake, when it frustrates the intent of the parties.
A party seeking to avoid performance under a contract likely would have to convince a court that the parties intended the terms “pandemic” and “national emergency” to be included in the force majeure clause, yet were not included through mistake of the parties. The counter to this argument is that the express terms contained in the agreement speak for themselves and represent the intent of the parties at the time of execution. That position also likely would be further supported if the subject contract includes a merger or integration clause.
Reliance upon a force majeure clause and common law defenses must be evaluated on a case-by-case basis. The language and terms contained in each contract, the purpose of each contract, and difficulties associated with performing obligations under each contract can dictate whether a party’s nonperformance of contractual obligations will be excused. Time usually is of the essence in such circumstances. McDonald Hopkins has the experience and expertise necessary to provide requisite evaluation regarding performance obligations and also counseling concerning rapidly-evolving legislation that may affect such obligations.