Pandemic Impact on the Performance of Contracts

Title:
Pandemic Impact on the Performance of Contracts
Publication:
Riker Danzig Client Alert March 19, 2020 - COVID-19: What Your Business Needs to Know
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Our country is in the midst of an unprecedented pandemic caused by the COVID-19 virus. Many aspects  of our lives are upended and a general sense of unease is gripping the nation. While our first concern will always be for the health and safety of our families, friends and fellow Americans, many of us will also face immediate, practical concerns regarding our personal and business obligations under the various contracts that permeate modern life.

While there is little doubt that future contracts will all now include a well-reasoned “pandemic” provision, the overwhelming majority of existing contracts do not include express language addressing performance or general enforceability during a global pandemic.

That said, there are four existing legal doctrines which likely touch upon a pandemic and the inherent disruptions that such an event causes to life and business: force majeure, frustration of purpose, impossibility/impracticability, and illegal purpose. In this short article we will take a brief look at these important concepts and their potential bearing on the pandemic.

Riker Danzig is operating and fully functional, and our attorneys are available to assist you with questions related to these doctrines as well as any other legal issues you may encounter during this trying time.

Force majeure

A force majeure clause (a.k.a. an “act of god” clause) allocates risk between the parties to a contract for events that are beyond the parties’ control.  These events include widespread conditions such as floods, fire, earthquakes and other catastrophes that render a party’s performance impossible or impracticable.

A force majeure clause will be construed, like any other contractual provision, in light of “the contractual terms, the surrounding circumstances, and the purpose of the contract.” Marchak v. Claridge Commons, Inc.,134 N.J. 275, 282, 633 A.2d 531 (1993).

The impacts of this current pandemic are widespread, but not yet completely known. It is likely, however, that force majeure will be a viable defense for the performance of at least some contracts. Elements impacting the viability of this defense will include, but not be limited to: the exact nature of the performance; the regional location of the performance; the current phase of the epidemic; whether alternative performance is available; and whether the force majeure clause was expressly included or implied in the subject contract (and more specifically whether the express clause anticipated pandemics/epidemics).

Frustration of Purpose

The doctrine of frustration of purpose may relieve a party of the duty to perform under a contract. This doctrine is triggered when a change in circumstances renders performance by one party completely worthless to the other party. The changed circumstance is generally an emergency that completely undermines the goal of the contract. Importantly, unlike force majeure, frustration of purpose is almost never an express provision in a contract. Rather it is implied by law as an equitable principle.

In order to successfully assert frustration of purpose as a defense to a contract, a party must demonstrate two things: 1) that the party’s reason for entering into the contract has been completely frustrated by an intervening event that is beyond that party’s control and occurred after the contract was executed; and 2) that the non-occurrence of the event was a reasonable and basic presumption for making the contract.

For example, imagine Alfonse enters into a contract with Marcia to rent Marcia’s Times Square Apartment on New Year’s Eve so that Alfonse can watch the ball drop. After the contract is signed, the City of New York cancels the ball drop event because there is a viral pandemic impacting the City. Alfonse could assert a defense of frustration of purpose because the sole purpose for renting the apartment on New Year’s Eve was to view the ball drop.  (This example is based on the famous 1903 case of Henry v. Krell in which an apartment was rented in London to watch the coronation of Edward VII.  King Edward unfortunately fell ill and was unable to attend his coronation. The King’s Bench court ruled that the purpose of the rental agreement was frustrated and allowed the renter to recover his deposit.)

There are numerous situations in which frustration of purpose will likely arise as a defense to performance during the current COVID-19 pandemic.

Impossibility and Impracticability

Impossibility and impracticability are two closely related legal concepts that allow a party to avoid performance. Like frustration of purpose, these doctrines are generally implied in contracts as a matter of equity. Impossibility, as its name indicates, is applicable when a party’s performance is rendered impossible by an intervening event. Common examples include natural disasters, deaths, and illnesses. Impracticability is a similar, but less stringent defense that requires a party to demonstrate that performance is more burdensome than anticipated at the time of execution.

Both of these defenses to performance require: 1) an unforeseen event; 2) no express allocation of risk between the parties; 3) that the non-occurrence of the event was a basic, implied condition of the contract; 4) and that the event has rendered one party’s performance impossible or impracticable.

Historically, if the only performance required is the payment of money, then impossibility and impracticability are generally not viable defenses even if the lack of funds is beyond a party’s control. For example, if Jack hires Juanita to paint Jack’s portrait and Juanita is unable to paint the portrait because a hurricane prevents her from reaching Jack, then Juanita could assert impossibility as a defense. On the other hand, if Juanita arrives to paint Jack’s portrait and Jack has no money, he generally would not be able to assert an impossibility defense. There are, however, potential circumstances in the current pandemic that might drive mere payment into the realm of impossibility – a nationwide lack of liquidity, government spending prohibitions, diversion of funds etc.

Illegal Contracts

A contract which requires a party to perform an illegal act is void and unenforceable as a matter of law. Common examples include contracts for the delivery of controlled substances, murders for hire and, more recently, internet gambling wagers.

In the current pandemic environment, federal, state and local government entities are adopting laws and issuing orders barring and prohibiting activities that were legal prior to the pandemic. These activities include gatherings of more than a certain number of people, the operation of bars and restaurants and the use of public transportation. Government entities have been actively enforcing these prohibitions. In Ocean County, New Jersey, for example, local police were recently ordered to break up two large weddings that were being held in violation of Governor Murphy’s Executive Order barring large gatherings.

In the event that the performance of an existing contract would now be illegal (e.g., a reception hall required to host a large wedding) either party to the contract might assert the defense of illegality. 

Contact the authors Stuart M. Lederman or Rudy S. Randazzo with any questions.

Please visit Riker Danzig’s COVID-19 Resource Center to stay up to date on all related legal issues.