Locke Lord QuickStudy: The Effect of the COVID-19 Pandemic on Contractual Obligations

The unprecedented COVID-19 pandemic has many companies and individuals wondering what their or their counter-parties’ continuing obligations are under contracts.

When events beyond the control of the parties to a contract prevent or impair performance of contractual obligations, render the parties incapable of performing their contractual obligations, or moot the essential purpose of the contract, legal concepts of force majeure, impossibility, and frustration of purpose may help to mitigate the adverse effects of such events by excusing the parties from their contractual duties.

In determining whether performance under a contract may be excused, one must start with the force majeure¹ provision (or lack thereof) in the applicable contract. If the contract provides for termination or suspension of performance by a party based on force majeure events, then the specific language of the contract will govern. If there is no such provision, statutory and common-law principles may fill in the gaps in the contract to determine the obligations of the parties as discussed below.

Contractual Provisions

If a contract has a force majeure clause, the determination of whether it will apply in the context of COVID-19 will in part be determined by whether the clause has specifically included pandemics, epidemics, viral outbreaks, or similar circumstances.

Where a contract specifically addresses pandemics—whether by exclusion or inclusion in the force majeure definition—courts ‎unsurprisingly will enforce the force majeure provisions as drafted. ‎

If, however, a contract does not expressly provide for pandemics or the like, it must be determined whether it would fall into the “catch-all” provision that many force majeure clauses include. This language may take different forms, such as “any act of God” or “a cause beyond the reasonable control of the parties” (among other possibilities). Although the specific language used will impact the interpretation of the provision, all similar provisions will generally be considered “catch-all” provisions.

In evaluating this type of “catch-all” provision, courts have generally interpreted that an event will not qualify as a force majeure event if it was foreseeable when the contract was signed.²

The question, then, whether the frustration of a contract due to COVID-19 will be considered within a catch-all force majeure definition will be a largely fact-specific question based on both the language used in the contract, as well as the ever-changing landscape of COVID-19.

Statutory and Common Law Gap-Fillers

If a contract lacks a force majeure provision and therefore fails to provide an ‎agreement on the allocation of risk in such circumstances (i.e., when performance will be excused), statutory and/or common law “gap-‎fillers” will apply. ‎

Under Uniform Commercial Code (“UCC”) Section 2-615 (Excuse by Failure of Presupposed Conditions), performance of the contract will be excused if ‎(1) the nonoccurrence of the event “was a basic assumption on which the contract was made” or ‎‎(2) the ‎parties must now comply, in good faith, “with any applicable foreign or domestic government regulation.”³ ‎That is, a contract under the UCC may be excused if either (1) if there are unforeseen supervening circumstances that the parties did not contemplate when coming to an agreement or (2) a party cannot perform due to regulatory changes. With the developing effects of the COVID-19 pandemic and increasing government intervention intended to address it, a party may therefore also be able to prove excuse of performance, not just because of the ‎pandemic, but also because of sudden governmental restrictions that impair performance.

In addition to the UCC, nonperforming parties to contracts without a force majeure provision may also turn to the common law doctrines of impossibility, impracticability, and frustration of purpose. Similar to UCC § 2-615, a claim asserting the common law doctrine of frustration of ‎purpose will ‎focus‎ ‎not on whether the performance is possible, ‎but on whether the contract has lost all purpose due to intervening circumstances that were not foreseeable when the contract was signed.⁴ Therefore, a party may be able to prove that the purpose of the contract is no longer viable in the face of recent health, economic, or regulatory developments.

We will continue to monitor these issues and will provide future client updates concerning these topics. This QuickStudy is for guidance only and is not intended to be a substitute for specific legal advice. If you would like more information on the matters discussed here or help with understanding your contractual obligations (as well as those of your contract counterparties), please contact the authors or your Locke Lord attorney.

Visit our COVID-19 Resource Center often for up-to-date information to help you stay informed of the legal issues related to COVID-19.