What to Do When the Coronovirus Prevents Performance of Contractual Obligations

Navigating principles of force majeure, impossibility of performance and frustration of purpose. Throughout the country and across the globe, businesses and individuals are facing unique challenges presented by the COVID-19 pandemic and the limitations of movement imposed by governments in its wake. The economic impact has been tremendous.

More and more, these challenges are requiring contracting parties, including tenants, lessees, licensees, payors and others, to reassess their obligations and find creative avenues for relief. Three main tools increasingly being used are force majeure clauses found in many existing contracts, and the defenses of impossibility of performance, and frustration of purpose. At their core, these tools rely on the notion that a party should not be responsible for, or penalized because forces outside of the control of either party (i.e., the COVID-19 pandemic) make it impossible to perform contractual obligations.

What is Force Majeure?

The term “force majeure” means unforeseen circumstances that prevent someone from fulfilling a contract.

A force majeure provision will be typically found in leases, licenses and other widely used contracts providing for suspension of one party’s or both parties’ performance upon the occurrence of certain designated events. In California, the force majeure test is “whether under the particular circumstances there was such an insuperable interference occurring without the parties’ intervention as could not be prevented by the parties’ prudence, diligence and care.”

In contrast, however, circumstances that may make performance of the contract more difficult or costly than the parties contemplated when the agreement was signed generally do not excuse performance.

It is important to note that the express language of the particular provision is critical in determining the application of this doctrine. For example, some provisions expressly reference government “actions” or “regulations,” whereas others simply refer to “acts of God” or more generic descriptions. Likewise, parties frequently restrict the application of these provisions by including express terms excluding application to certain obligations, such as rent. These restrictions have consistently been upheld in California.

When Performance is “Impossible”

If a contract does not contain a force majeure clause, or if the clause is inapplicable to the current circumstances, parties may also resort to the doctrine of impossibility of performance. This concept is largely what it sounds like – i.e., a party may be relieved of its duties under the contract where performance would be impossible due to an event outside of its control.

As with force majeure, the mere fact that performance is made more difficult or expensive than originally contemplated is generally not enough. Rather, this doctrine envisions true impossibility of performance, or what courts have considered to be “excessive” or “unreasonable” costs.

Given the unprecedented nature of our current circumstances, the standard for what courts would consider “impossible” now may differ from prior cases, and in any event is largely fact-specific.

Additionally, and especially given present circumstances, the effect of impossibility or impracticability may be temporary, which could result in a suspension or delay in performance, rather than a permanent discharge. Again, this is highly fact-specific, and anyone seeking to rely on this doctrine should consult with their attorneys first.

Frustration of Purpose

Finally, performance may also be excused by the doctrine of frustration of purpose. This doctrine applies when performance is technically possible, but an unforeseen event has effectively destroyed the value of the consideration to be rendered.

As with the prior analyses, mere increased expense or difficulty does not rise to the level of frustration of purpose. To establish frustration of purpose, a party must show that, although performance under the contract remains possible, the fundamental reason that both parties entered into the contract has been frustrated by unanticipated supervening circumstances that destroy the value of the performance to the party attempting to enforce the contract.

Although the doctrines are related, frustration of purpose is not a form of impossibility of performance. It focuses on the consideration for performance. To excuse nonperformance of a contract on the ground of frustration of purpose:

  • The basic purpose of the contract, which has been destroyed by the supervening event, must be recognized by both parties to the contract;
  • The event must be of a nature not reasonably to have been foreseen;
  • The frustration must be so severe that it is not fairly to be regarded as within the risks that were assumed under the contract; and
  • The value of counter performance to the promisor seeking to be excused must be substantially or totally destroyed.

Keep in mind that frustration is not a defense if the event was reasonably foreseeable. In other words, if the parties contemplated the event, or allocated the risks arising from the event in their contract, they may not be able to invoke this doctrine.

When Do These Tools Become Necessary?

The most common and urgent context in which these contractual defenses have been raised relates to rent and other financial obligations under leases, licenses and other contracts. For example, commercial and residential leases where the tenants have been impacted by local and state stay-at-home orders, or businesses confronting severe difficulties in meeting independent contractor and vendor payment obligations in different business contexts for the same reason.

In every context, the most important matters to consider in weighing the application of these defenses are (1) the terms of the actual lease or other contract at issue, particularly the force majeure provision and (2) even more importantly, the practical real-world impacts of the recent governmental orders aimed at curbing the community spread of the COVID-19 virus.

For further information related to contract defenses, or to further explore the impact of the coronavirus on your business, please contact your main Glaser Weil partner, or contact Glaser Weil’s COVID-19 Taskforce at covid19taskforce@glaserweil.com.

This article has been prepared by Glaser Weil LLP and is intended for informational purposes only. It is not legal advice and its transmission is not intended to create, and receipt by you shall not constitute, the creation of an attorney-client relationship. While we have attempted to provide information as accurately and timely as possible, it is not intended to be a full discussion of all aspects of the subject matter and applicable in all jurisdictions. It is not a substitute for legal advice from a qualified attorney licensed in the appropriate jurisdiction and with knowledge of your particular facts and objectives. Glaser Weil LLP expressly disclaims all liability with respect to actions taken or not taken based on the contents of this article and urges you to contact us or any other qualified attorney to discuss in greater detail your legal situation.