Tuesday, December 01, 2020

Legal Defenses When COVID-19 Causes Breach of a Contract

By Casey Erick

 

Covid-19 continues to interfere with the ability of businesses across all industries to meet contractual obligations.  Yet, contracts can provide for termination or delay if they  contain what is called a “force majeure” clause.  Force majeure is French for “superior strength.” From the start of the pandemic, businesses began reviewing their contracts to ensure  they included language aimed to cover all unforeseen reasons that could prevent or delay performance. 

 

Force Majeure

Force majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, epidemic or an event described by the legal phrase “act of God,” prevents one or both parties from fulfilling their obligations under the contract. In practice, most force majeure clauses do not excuse a party's non-performance entirely, but only suspends it for the duration of the force majeure.  Whether a party can rely  on force majeure clauses will depend on what the clause actually says, and courts tend to take a strict approach to interpreting these clauses.

 

COVID-19 Pandemic

If non-performance was caused by COVID-19, you would have to determine if it actually falls within the scope of the definition of force majeure. Use of words like “disease” or “epidemic” within the definition are likely to cover COVID-19 (and similar broad-reaching epidemics).  Use of the terms “act of God” or “events beyond a party’s reasonable control” may also suffice. However, the exact wording and whether lists of included events are to be interpreted as exhaustive or non-exhaustive must be carefully considered in each case.

When force majeure has not been provided for in the contract (or the relevant event does not fall within the scope of the force majeure clause), and a supervening event prevents performance, it will be a breach of contract. The law of frustration will be the sole remaining available course to end the contract by the party in default. If the failure to perform the contract deprives the innocent party of substantially the whole benefit of the contract, it will be a repudiatory breach, entitling the innocent party to terminate the contract and claim damages for that repudiatory breach.

 

Frustration

Without a force majeure clause, the only other route available to try to escape performance is to rely on the doctrine of frustration. Frustration allows a contract to end when an unforeseen event happens that makes performance of the contract impossible to fulfil. The contract is ‘frustrated’ and treated as discharged by automatic operation of law. This means there is no need to perform future obligations and so parties to a frustrated contract cannot claim damages from one another for non-performance.

Frustration imposes a high burden on the party.  The following must be shown:

  • The interference happened after the contract was formed;
  • The interference is not the fault of either party;
  • The interference is beyond what the parties contemplated at the time they entered the contract, and the interference is so fundamental it goes to the heart of the contract; and
  • The interference makes performance of the contract impossible, illegal, or fundamentally different from what the parties contemplated at the time they entered it.

The frustration standard is rarely met. It will not be enough for the event to merely have made the contract more difficult or costly to perform or that it has delayed performance – the event must make performance impossible.

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