Contract Performance in a Pandemic

Contract Performance in a Pandemic

Introduction

Although the best drafted contracts anticipate risks and attempt to allocate them among the contracting parties, it is unlikely any contract fully anticipated the economic and commercial impact of the novel coronavirus pandemic.  But how is a retail store able to meet its lease obligations with no revenue coming in?  How can a construction supplier meet its obligations if the product or raw materials are simply not available? We are not experiencing the economy slowing to a trickle, in many sectors the faucet went from wide open to completely closed in a matter of weeks.

If the current commercial slowdown and/or governmental directives are impacting your ability to perform contractual obligations, can you be relieved of those obligations.  The very unsatisfying answer is, it depends.  Unfortunately, there are no definitive answers but there is some interesting case law from North Carolina and elsewhere.  Click here for an interesting article describing several cases that came out of the 1918 flu pandemic.  

For our analysis, the starting point, as always when analyzing contractual rights and obligations, is the contract itself.  Absent a contract provision that anticipates and addresses the specific circumstances, either a government shutdown or more specifically a “pandemic” provision, the most likely place to find relief is in a force majeure clause.  Without contract relief, there are several legal doctrines that may provide excused performance in specific circumstances.

Force Majeure

The first question is whether your contract contains a force majeure clause.  The term literally means “superior force” in French.  If your contract contains such a clause. it is designed to excuse performance in the event that some superior force prevents performance but whether you can expect relief from this clause depends upon the language used.  A very broad clause will read something like this:

Party A shall not be liable for any failure or delay in the performance of its duties to the extent the failure or delay is caused by a force majeure or event beyond its reasonable control, including, but not limited to, any fire, act of God, war, government action, act of terrorism, epidemic, pandemic, natural disaster or other major upheaval.  If such an event occurs, Party A’s duties and obligations will be suspended immediately and without notice, until such time as Party A, in its sole discretion, may safely perform its duties.  If performance is not possible due to such event, performance of duties is excused. 

If your contract excuses performance under terms like these you do not need to read any further.  Your contract is very unlikely to contain this broad a clause but more narrowly tailored clauses may also provide relief.

Frustration of Purpose

The doctrine of frustration of purpose may be available as a defense to performance in some cases as a result of the pandemic.  For instance, assume you rented an AirBnb in Augusta, Georgia because you miraculously obtained tickets to the Masters tournament this year.  In all likelihood, the doctrine of frustration of purpose would allow you to back out of the rental when the Masters was cancelled as a result of the pandemic.

In North Carolina, the doctrine of frustration of purpose requires “an implied condition to the contract” such that a change in that condition could excuse performance. Faulconer v. Wysong & Miles Co., 155 N.C. App. 598, 602, 574 S.E.2d 688, 691 (2002).  However, “[i]f the frustrating event was reasonably foreseeable, the doctrine of frustration is not a defense.  In addition, if the parties have contracted in reference to the allocation of the risk involved in the frustrating event, they may not invoke the doctrine of frustration to escape their obligations.  Brenner v. Little Red Sch. House, Ltd., 302 N.C. 207, 211, 274 S.E.2d 206, 209 (1981).

Impossibility and Impracticability

Contractual performance may be excused where the otherwise breaching party could not perform because performance was impossible.  For instance, in UNCC v. Greene, 111 N.C. App. 391, 397, 432 S.E.2d 699, 702 (1993), the court excused the failure to convey an easement as contracted after the property in question was condemned by the government.
 
Impossibility of performance and commercial impracticability are similar and under North Carolina law difficult if not impossible (pun intended) standards to meet.  For instance, in Knowles v. Carolina Coach Co., 41 N.C. App. 709, 714, 255 S.E.2d 576, 579 (1979), the hour rejected impracticability in a lease dispute even when the landlord was partially responsible for the tenant’s inability to meet rent obligations.  A distinction can be made for the current circumstances based upon the inability to anticipate these circumstances.  However, the Knowles court cited with approval a California decision rejecting the defense for a car dealership that could not sell cars after all manufacturers switched to wartime production during World War II.

Illegal Contracts

A basic premise of contract law is that an agreement to perform an illegal act is null.  On March 27, 2020, Governor Cooper issued a “Stay at Home” Executive Order that restricted “mass” public gatherings.  A contract for the use of a wedding hall for 100’s of guests, which was legal on March 1st, became an illegal contract.  Either party should be able to terminate the contract under the illegal contract doctrine.  This example might also fit the frustration of purpose doctrine.

The doctrine makes a contract the performance of which would be illegal non-enforceable.  A through review of the contract and the various restrictions imposed during the pandemic is necessary, however.

Relief in Construction and Sale of Goods Contracts

In addition to these general legal doctrines, there is potential relief in specific types of contracts.  For instance, many construction contracts contain force majeure clauses, which may provide relief but may also indicate that the basis for non-contract based relief was anticipated and therefore unavailable.  Construction contracts also contain specific provisions for delayed performance and some may have provisions related to unexpected cost escalation.  We have addressed cost escalation in a webinar, which can be found here and are currently preparing a webinar on delays, which will be posted on this site when available.

The Sale of Goods is governed by the Uniform Commercial Code and the answer to whether relief is available may be different in that context.  We have addressed the issue of performance relief in that context in a separate post, which can be found here.

Disclaimer

This post is an overview of certain contract law principles and is not to be considered legal advice.  Contract law varies from state to state and contracts governed by the laws of other states may be subject to different interpretations.  Likewise the principles described above may be interpreted differently under different circumstances.  You should contact your attorney who will analyze the applicable facts, the contract, and applicable law.