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.
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