The novel 2019 coronavirus (COVID-19) pandemic is causing major disruptions to many commercial supply chains resulting in anticipated delays, reduced fulfillments, and even cancellations of contractual orders and requirements. Many of these disruptions may be resolved through negotiations where the contracting parties agree to modify or negate various contract requirements. When negotiations fail, however, the following legal doctrines may apply:
• Force majeure;
• Impossibility of performance;
• Frustration of purpose.
This is a complicated legal area, about which you should obtain counsel.
Many contracts contain force majeure clauses, under which the parties are excused from performance under certain unforeseeable and severe circumstances. The language of these provisions may vary from contract to contract. Some, for example, may refer more generally to “Acts of God” or war as excused causes of nonperformance, while others may refer to specific natural catastrophes such as fires or floods or other actions such as strikes. Still others, more broadly, excuse performance for circumstances beyond the reasonable control of the parties. Whether a force majeure clause will be enforceable in the COVID 19 context depends on the contract language and the parties’ specific factual circumstances, including
• The precise language of the force majeure clause;
• Whether the force majeure event (COVID-19 pandemic) was unforeseeable;
• Whether the force majeure event (COVID-19 pandemic) caused the nonperformance; and
• Whether the effects of the force majeure event (COVID-19 pandemic) are so severe that contract obligations cannot be performed.
Given the variations on contractual language and because it is unlikely that an existing force majeure provision will refer to a “pandemic,” it is important to review any specific force majeure provision and other contract provisions, including those regarding default, liquidated damages, limitation of liability and termination.
IMPOSSIBILITY/IMPRACTIBILITY OF PERFORMANCE
Where a contract contains a force majeure provision, that provision will likely govern the parties’ performance obligations. Where a contract contains no such provision, however, the doctrines of impossibility or impracticability of performance may apply.
The impossibility doctrine excuses one party from performing under a contract when performance would be “excessively burdensome” due to an unforeseeable event out of the nonperforming party’s control. Courts, as a last resort, would determine whether the facts of each case satisfy the excessively burdensome standard. Further, the event leading to nonperformance (COVID-19 pandemic) must be so unlikely that a reasonable party would not have included protections against it in the contract. Under the Uniform Commercial Code, which applies to the sale of goods,
• The seller must not have assumed the risk of some unknown contingency;
• The nonoccurrence of the contingency must have been a basic assumption underlying the contract; and
• The occurrence of that contingency must have made performance commercially impossible/impracticable.
The COVID-19 pandemic might appear at first glance to be exactly what these doctrines were intended to cover. A determination of their applicability, however, depends on a number of factors, which may include the nature of the event at issue, the event’s temporary or permanent nature, the overall contract terms, the parties’ sophistication, and the business risks contemplated when the contract was executed. Simply incurring additional costs, or being hurt by market conditions, may not fall within these doctrines. The COVID-19 pandemic, moreover, is a unique circumstance which may have a unique construction under these doctrines.
Supply contracts are often multi-state agreements. In addition, the UCC, while generally uniform, does contain differences among the states that have adopted it. It is therefore important to pay attention to the particular jurisdictions at issue, the specific contract terms, and your unique factual circumstances.
FRUSTRATION OF PURPOSE
The frustration of purpose doctrine, which applies to contracts for goods and services, does not directly involve a party’s inability to perform under a contract. Instead, it involves circumstances under which an event fundamentally changes the purpose of a contract.
If the principal purpose of a contract is frustrated, through no fault of a contracting party, the doctrine may apply to excuse contract performance. This doctrine has a high bar to meet since the frustrated event must have been a primary purpose of, and incentive to, entering into the contract in the first place. In addition, the event at issue must not have been within the risks contemplated by the contract.
As with the other doctrines discussed above, the frustration of purpose doctrine requires a detailed analysis of the contract’s terms and the underlying factual circumstances.
Fox, O’Neill & Shannon, S.C. remains here to help you and your business make some legal sense of these uncertain times. Please contact your FOS attorney with any questions you may have regarding COVID-19 or any other legal issue.