The global outbreak of the novel coronavirus (COVID-19) has tragically affected millions worldwide, upending the lives of individuals and families and causing disruptions for businesses of all sizes and in all sectors. The rapid spread of the pandemic has given rise to business and consumer uncertainty as to the legal effect of contracts in light of unforeseeable circumstances, such as the coronavirus (COVID-19) pandemic.
Many contracts will be breached as long as this pandemic continues. The question becomes whether a breaching party can be excused without liability.
California recognizes the plight of a party to a contract where an unforeseeable event occurs: “No man is responsible for that which no man can control.” Cal. Civ. Code § 3526. Such unforeseeable events may trigger a “force majeure” clause in a contract so as to dictate what happens when events are out of the parties’ control thereby preventing a party from fulfilling its contractual duties. Where a force majeure clause is absent from the contract, the Courts will instead rely on a fact-stringent analysis in determining the impossibility, impracticability, and frustration of the purpose of the contract at issue.
“Force majeure,” or the Latin expression “vis major,” excuses a party’s performance of obligations pursuant to a contract where occurrences arise that are beyond the parties’ control, making performance of the contract impractical or impossible. The test is whether under the particular circumstances there was such an insuperable interference occurring without the party’s intervention as could not have been prevented by the exercise of prudence, diligence, and care. See National Carbon Co. v. Bankers’ Mortgage Co., 77 F.2d 614, 617 (1935).
Force majeure events that are typical in contracts include:
- “Acts of God,” which include natural disasters (fires, floods, earthquakes)
- Outbreak of war and acts of terrorism.
- Strikes and labor disputes.
- Global Epidemics.
Force majeure clauses are negotiated into contracts so as to clarify who bears the risk of force majeure events and to define what those events are. These clauses are not all identical and must be assessed based on the express terms in the contract. If the clause lists the specific event of force majeure, then that event will excuse or delay performance. In instances such as what we are facing now with the novel coronavirus (COVID-19), the courts have held that similar and truly unforeseeable events are included even though not specifically enumerated.
Performance of an obligation or delay thereof is excused “[w]hen it is prevented or delayed by an irresistible, superhuman cause…unless the parties have expressly agreed to the contrary.” Cal. Civ. Code § 1511. California law has not yet been established as to the applicability of force majeure clauses on the novel coronavirus (COVID-19) to date, but it is likely that such disputes and litigation will increase within the year.
If you have a force majeure clause in a contract where you cannot either perform, or timely perform, your obligations thereunder, you may be excused from performance. The burden of proving impossibility or excuse is on the party asserting the defense. Butler v. Nepple, 54 Cal.2d 589, 598-599 (1960). Do not assume that you are excused – it is essential to have an attorney review your contract so as to inform you of your legal rights, liabilities, and obligations.
Frustration of Purpose, Impossibility and Impracticability
If your force majeure clause is unenforceable or your contract is devoid of a force majeure clause, you may have other viable options.
The defense of impossibility is exactly as it sounds – a party can argue that it did not perform its obligation under a contract because it was impossible to do so. This is a fact-specific analysis and will only applicable if there is no possible way to perform. Extreme expense or hardship, if incurred in performing the obligation, will not invoke the defense of impossibility (but may invoke the defense if impracticability – see below). As the U.S. and numerous states continue to implement “stay at home” orders, businesses may be able to argue that performance under their contracts are impossible (example: nightclubs in California are required to remain closed. Therefore, a DJ’s required performance on a specific night under a contract with the nightclub owner may very well be excused due to impossibility – the nightclub must remain closed on that evening pursuant to law).
If performance under a contract is not exactly impossible, but would be unduly burdensome or extremely expensive to perform due to the novel coronavirus (COVID-19), a party may be able to invoke the defense of impracticability. The doctrine of impracticability in California will apply where the event was unforeseeable and beyond the control of the breaching party, the breaching party did not expressly assume the risks associated with the event, and that performance under the contract would cause undue hardship and/or extreme expense for the breaching party.
Finally, a breaching party may rely on the doctrine of frustration of purpose as a defense. Here, the Courts will establish the fundamental purpose of the contract and determine whether the unforeseeable event “substantially destroyed” the purpose of the contract for the parties. For example, this situation is appearing more and more as various shows and events are cancelled due to stay at home orders imposed by the state due to the pandemic. Parties that have leased commercial venues (and have promised to pay the owner for use of the space) claim that their purposes of using the commercial venues are now frustrated since there is a statewide ban on mass gatherings – an unforeseeable occurrence through no fault of the breaching party.
Of course, these are all fact-specific and the applicability of each defense must be viewed in the totality of the circumstances.
If you can’t perform due to the coronavirus (COVID-19) pandemic or are demanding performance under an existing contract, it’s important that you consult with a qualified attorney immediately. It is essential that individuals and businesses protect themselves and their assets in the event of a contract dispute. Contact The Taba Law Firm for a consultation. This information is being provided by The Taba Law Firm for informational purposes only and should be construed as legal advice.