Contractual Obligations and COVID-19

Due to the outbreak of the novel coronavirus (COVID-19), many parties are finding themselves unable to meet their contractual obligations.  Likewise, many parties are having difficulty enforcing the provisions of a contact, and instead are met with non-performance.  For those unable to meet their contractual obligations, they may find relief in the contract itself if it contains a force majeure provision.  These provisions excuse non-performance under certain, enumerated circumstances.  Further, in New York, if a contract becomes impossible to perform, or the contract's purpose has been frustrated, non-performance may be excused.    

At common law, the doctrine of impossibility is usually narrow.  However, due to the unforeseen circumstances parties to contracts now face, courts may be more willing to expand this defense.   Currently, impossibility typically only excuses a party’s performance when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Several employers and businesses are now grappling with contractual obligations that they can no longer abide by.  Many businesses can no longer uphold their contractual obligations.  For example, The Cheesecake Factory cannot pay its monthly rent for any of their 300 locations across the country.[1] If it has become impossible for businesses to comply with their contractual obligations due to COVID-19, courts may have to expand the application of the doctrine of impossibility to meet the needs of the current crisis.   

For contracts that do contain a force majeure provision, the ability to utilize that provision during the outbreak will depend entirely on the language of the provision itself.  New York Courts have, again, historically applied a narrow interpretation of force majeure provisions, but this will likely change.[2] “Ordinarily, only if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused.” Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902-03 (N.Y. 1987).  If the words "epidemic", "communicable disease outbreak", "public health emergency" or "reportable communicable and virulent disease" are not included in the contract, it is entirely possible that a court will not permit the invocation of force majeure as a defense for failure to perform due to COVID-19.  However, one of the other defenses for non-performance, such as impossibility or frustration, may still apply.

If a contract does not contain a force majeure clause, and an impossibility or impracticability defense fails, another possible defense for a party unable to fulfill its obligations under a contract due to COVID-19 is frustration of purpose.[3] In order to qualify for the defense of frustration of purpose, there must have been an unforeseen event that severely undermines the original justification for entering into the contract. Restatement § 265.  Often, frustration of purpose comes from changes in governmental rules or regulations but, almost any event can be the basis of a frustration of purpose defense so long as:

  • the event was unforeseen by the parties;
  • the event was caused by a third party or outside force; and
  • the event makes performance of the contract contrary to the original understanding of the parties.

If, after the contract is formed, circumstances arise which substantially frustrate a party’s purpose in entering into the contract, the party’s remaining duties are discharged, provided:

  • the party seeking discharge was not at fault;
  • the non-occurrence of such event was a basic assumption on which the contract was made; and
  • the language or the circumstances do not prohibit excuse based on frustration of purpose.

Restatement § 265.

"In order to invoke the doctrine of frustration of purpose, the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense. See 22A NY Jur 2d, Contracts § 375.  The doctrine of frustration of purpose is not available where the event which prevented performance was foreseeable and provision could have been made for its occurrence.  Warner v. Kaplan, 71 A.D.3d 1, 6 (1st Dept. 2009).  While New York Courts have held that the doctrine is narrow and the frustration must be substantial, it is entirely possible that courts will be forced to take a more expansive view of this exception as more and more parties are unable to meet their contractual obligations. 

Overall, New York Courts appear to be hesitant to relieve parties of their contractual obligations, absent a specific force majeure provision listing the triggering event.  However, the COVID-19 outbreak will present courts across the country with a new, unpredictable obstacle preventing parties from performing their contractual duties.  Indeed, this is uncharted territory for most, if not all, judges, lawyers, and parties alike.  As courts across the country grapple with cases involving impossibility and frustration, we may see a more expansive view of the defenses to non-performance.  Parties to contracts should still consult with legal counsel in determining whether these exceptions may apply before absconding on their contractual obligations. 

For more information, please contact CCB Law.

[1] https://www.cnn.com/2020/03/26/business/cheesecake-factory-april-rent-coronavirus/index.html

[2] Id.

[3] https://www.akerman.com/en/perspectives/the-coronavirus-and-force-majeure-clauses-in-contracts.html