Business Law: Can Businesses Avoid Breach of Contract Claims Due to COVID-19?

There are three main legal theories that might be applicable in a pandemic situation like COVID-19 which would allow businesses to defend against lawsuits for breach of contract. These are:

• Force majeure provisions in the contracts
• Doctrine of impossibility/impracticability and
• Doctrine of frustration of purpose

Here is a general summary of how these provisions and legal doctrines are applied.

Force Majeure Provisions

A force majeure provision is one that is negotiated in advance by the parties and included in the contract. The general idea is for the parties to negotiate various agreed-upon future conditions that would excuse performance by one or both parties to the contract if any of those conditions occurred. For example, the parties might agree, in advance, that one or both parties would not be liable for any failure or delay in performance caused by “forces beyond their control” like acts of war, act of terrorism, labor strikes, failure of utilities and/or economic disruptions caused by a pandemic like the COVID-19 virus. Generally, courts in the United States will enforce these types of contractual provisions. As such, “force majeure” might be a sufficient and successful defense to a lawsuit filed for breach of contract. That being said, many force majeure provisions build in the concept of delay. That is, performance is excused as long as the force majeure condition continues. With respect to those types of contractual provisions, performance is not totally excused; rather, a delay in performance is excused.

Doctrine of Impossibility/Impracticability

For business contracts that do not contain a force majeure clause, the legal doctrine of impossibility can be used to accomplish something similar. In general, a breach of contract lawsuit can be defended by showing that performance was impossible (or so impracticable as to be considered impossible) through no fault of the non-performing party. Generally speaking, there are two types of impossibility: factual and legal. An example of a factual impossibility would be the destruction of the object that the subject or purpose of the contract. For example, if the contract concerned the purchase of a specific piece of artwork and the artwork were to be destroyed, then it would be impossible to perform the contract. Legal impossibility generally involves some change to the law or a governmental prohibition that now makes something impossible that might have been possible when the parties made the contract. Examples might include:

• Shortages caused by government shutdowns
• Loss or delays of raw materials due to shipping restrictions
• Shelter-in-place order for non-essential businesses
• Labor restriction due to declared health emergencies
• And more

However, as with force majeure clauses, typically the doctrine of impossibility only applies as long as the condition causing the impossibility persists. Obviously, if the object of the contract is destroyed, that condition — the destruction — is permanent. But other types of conditions, such as shipping and travel restrictions, are often temporary. Once, the conditions are no longer applicable, then the doctrine of impossibility will no longer be a defense to a suit for breach of contract.

Doctrine of Frustration of Purpose

Another possible defense to a breach of contract lawsuit is the doctrine of frustration of purpose. Courts will excuse non-performance under this doctrine where there has been an extreme hardship that was unforeseen when the parties made the contract that should excuse non-performance on the grounds of “fairness.” Unlike the doctrine of impossibility, the doctrine of frustration of purpose can be invoked even if the parties can perform. An example might be payment of rent for a local restaurant during a government-ordered COVID-19 shutdown. It is not impossible for the restaurant owner to pay the rent. However, the owner might invoke the frustration of purpose doctrine to argue that it would be unfair to require performance given that the government has prevented the restaurant from operating.

The defense of frustration of purpose is not favored by the courts. It is a difficult defense to win. Further, like the other theories discussed in this article, timing is a factor. If the conditions resulting in frustration are temporary, then the parties can expect that any relief of contractual obligations will only apply to the time period when the conditions were extant.

If you have questions about these breach of contract defenses or other business-law related questions, contact the business lawyers at Revision Legal at 231-714-0100.