The Impact of COVID-19 on Contractual Obligations

Businesses are citing to force majeure provisions to excuse non-performance in the wake of the coronavirus pandemic, a response which begs the question: does coronavirus actually fall within the legal definition of force majeure? This discussion looks at what force majeure means generally as to contract enforceability and specifically with regard to COVID-19.

Force Majeure: Basic Principles
Force majeure clauses are contract provisions that excuse a party’s nonperformance when extraordinary events (referred to frequently as “acts of God”) prevent a party from fulfilling its contractual obligations. Courts look to several elements when considering the applicability of a force majeure clause in a breach of contract suit: (1) whether the event qualifies as force majeure under the terms of the contract; (2) whether the risk of nonperformance was foreseeable and could have been mitigated; and (3) whether performance is truly impossible (as opposed to simply difficult). Though these elements may sound broad in scope, courts interpret force majeure clauses narrowly; the court’s inquiry largely focuses on whether the event giving rise to nonperformance is specifically listed as a qualifying force majeure in the clause at issue. The inquiry does not stop there, however. Even if a party can surmount this requirement, it cannot invoke force majeure if: (1) it could have foreseen and mitigated the potential nonperformance and (2) performance is merely impractical or economically difficult as opposed to truly impossible (keeping in mind that local jurisdictions may deviate from this general standard).

COVID-19 as a Force Majeure Event
With contractual nonperformance and potential breach of contract lawsuits looming, businesses are asking whether the coronavirus outbreak legally constitutes a force majeure event. The World Health Organization’s (“WHO”) classification of COVID-19 as a “pandemic” will trigger force majeure clauses that expressly account for pandemics. If, in light of WHO’s declaration, a force majeure clause clearly references COVID-19 or pandemics, parties seeking to enforce the provision will not need to establish that the event was unforeseeable. They will, however, still need to prove that: (1) they took steps to mitigate the damage and (2) performance is truly impossible. Under the current force majeure analysis, clauses that are silent with regard to pandemics, epidemics, viral outbreaks, etc. will likely fall short of a force majeure defense. Like other events, a pandemic must be specifically stated in a force majeure clause; standing alone, the declaration of a pandemic will not automatically constitute a force majeure given the courts’ focus on the language of the contract.

The restrictions the state and city governments have implemented in response to the virus, however, may affect New York’s force majeure standard. So many of the business interruptions are the result of expanding government regulations concerning the virus. If the force majeure provisions at issue contain language about governmental orders or regulations, businesses may be able to invoke those provisions to excuse contractual nonperformance resulting from governmental coronavirus measures. The enumeration of government regulation events will not end a court’s analysis, however. Parties seeking to avail themselves of force majeure protections must still satisfy the other prongs of the inquiry and must establish their inability to mitigate damages and well as the impossibility of performance.

Contracts Without Force Majeure Clauses
Not all contracts contain force majeure provisions, let alone ones that reference pandemics. In the absence of a force majeure provision or a provision with language applicable to the instant pandemic, parties may invoke common law mechanisms for excusal of nonperformance, such as the doctrines of impossibility or frustration of purpose. The doctrine of impossibility may excuse nonperformance in New York if a party establishes that: (1) an unexpected intervening event occurred; (2) the agreement assumed such an event would not occur; and (3) the unexpected event made contractual performance impossible. A court may excuse a party’s nonperformance under this principle where the event preventing performance was unexpected or was not a foreseeable risk at the time of the contract’s execution. Even if an event was unforeseeable, courts will still assess whether the “nonoccurrence” of the event at issue was a “basic assumption” on which the contract was made.

The doctrine of frustration of purpose focuses on whether the event at issue has obviated the purpose of the contract and requires that: (1) an event substantially frustrates a party’s principal purpose; (2) the nonoccurrence of the event was a basic assumption of the contract; and (3) the event was not the fault of the party asserting the defense. This doctrine depends on whether the unforeseeable event has significantly altered the circumstance of an agreement such that performance would no longer fulfill any aspect of its original purpose. New York courts tend to interpret the elements of this doctrine broadly, however, such that the frustration must be near total, not merely unprofitable or detrimental.

Enforcing Contracts in a Coronavirus World
As the COVID-19 pandemic continues to evolve, parties should evaluate the viability of either force majeure or common law principles excusing nonperformance of contractual obligations. Companies anticipating business interruption should also review potentially applicable insurance policies and provisions, including business interruption and contingent business interruption insurance. For more information on the effect of COVID-19 on contractual obligations and force majeure provisions, we invite you to contact Bruce F. Bronster, Esq. at (347) 246-4650. We intend to closely monitor the legal and business implications associated with coronavirus pandemic, and we will continue to report developments and issues affecting our clients.