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Contracting Parties Beware: COVID-19 Does Not Render All Performance Obligations “Impossible”

Contracting Parties Beware: COVID-19 Does Not Render All Performance Obligations “Impossible”

Apr 20, 2020

By Kenneth L. Moskowitz, Esq. and Michele-Lee Shapiro, Esq.*

The extraordinary circumstances surrounding the COVID-19 pandemic — including widespread illness, government stay-at-home orders, and restrictions on travel — have rendered the performance of many contractual obligations unfeasible, impractical, and, in certain circumstances, excused by the contract’s force majeure provisions. However, not every contractual duty will be deemed impossible to discharge, and contracting parties must be careful not to assume that a broad-sweeping “coronavirus defense” will excuse them from legal accountability for non-performance.

First, the parties must carefully consider the terms of the contract itself. The applicability of force majeure [1] or cancellation provisions must be analyzed, as those provisions alone may govern the parties’ dispute. In addition to force majeure terms, the parties must also carefully consider the impact of any separate contract provisions that address indemnification, fee-shifting, or “compliance with all laws.” Assuming that these provisions are clear and applicable, a court should enforce the contract terms rather than consider any equitable arguments that would result in the court making a different or “better” contract for the parties.

Where a contract is silent or ambiguous with respect to the right to cancel or excuse non-performance due to an extraordinary reason like the coronavirus pandemic, however, the parties (and, ultimately, the court) may consider the equitable doctrines of impossibility and impracticability to determine whether non-performance or partial performance can be excused. The application of these doctrines will be highly fact-specific, and parties cannot and should not assume that they will be excused from their contractual obligations because of the far-reaching consequences of COVID-19. Certain limitations on the application of these doctrines are well-established and courts, notwithstanding the many hardships resulting from the crisis, can be expected to carefully examine each set of facts on its own merits, rather than accept a one-size-fits-all coronavirus excuse for the non-performance of contractual obligations.

Two types of impossibility may relieve a promisor from liability where a contractual undertaking becomes objectively impossible to perform: original impossibility, where the performance was impossible at the time the contract was made, and supervening impossibility, which arises after the contract is executed. Parties to a contract seeking to invoke a coronavirus-related defense will fall under the category of supervening impossibility. The doctrine of impossibility at one time strictly required a change in circumstance that made performance of the contract literally impossible. The doctrine has evolved and is now more broadly termed “Discharge By Supervening Impracticability” by the Restatement Second of Contracts §261, which states:

“Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.”

The doctrine may be invoked only where a catastrophic event — not caused by the party seeking to be relieved of its contractual duties — not only renders performance impossible, impracticable, or exceptionally burdensome, but also was so unforeseeable that the parties could not have drafted contractual provisions to address the circumstance.

The wake of the coronavirus crisis will most certainly bring an increase in litigation in which a party asserts an impossibility or impracticability defense to a claim of breach of contract. It is likely that, in many of these cases, a litigant will argue that performance was rendered impossible due to a government “stay-at-home” or other directive. A survey of the existing case law demonstrates that it would be unwise to assume that any set of circumstances will be sufficient to render performance impossible per se. [2] For example, financial hardship alone has been held not to render performance impossible, even where the financial distress results from a global economic crisis. [3] Even where a force majeure event had occurred, such as the September 11, 2001 attacks, and even where the contract at issue specifically included terrorism as a force majeure event, a party’s financial instability resulting from the event has been held not to constitute impossibility excusing performance. [4]

In other examples, courts have held that performance is not excused by an individual employee’s incapacity to perform. [5] Additionally, an Illinois District Court, applying New Jersey law, rejected an argument of impossibility of performance where a physical restriction prevented access to the business. [6] In Pennsylvania, a commercial tenant argued unsuccessfully that he should be excused from performance under a lease pursuant to the doctrine of impossibility, where Tropical Storm Allison flooded the premises and the tenant’s business slowed considerably because, as the tenant argued, even after the flood damage was remediated, clients would not want to enter the premises in its newly altered condition. [7]

Contractual performance has not been excused in certain extreme circumstances. For example, even where a party’s performance of an employment contract under which he served as the general manager of an American company operating in Iran was hindered by the employee’s arrest, imprisonment, and torture, and impeded by the seizure of the company by the foreign government during the Iranian Revolution of 1979, such performance was not deemed impracticable at the motion to dismiss stage. [8] An Arizona Court of Appeals held that even the risk to air travel created by the Gulf War in Iraq and the threats of worldwide terrorism that existed at that time did not render a contract impracticable so as to excuse a convention organizer from paying for facilities it reserved. [9]

Assessment of the particular facts of each case will be paramount to a court’s determination of whether the impossibility doctrine will excuse a party’s failure to perform its contractual obligations. As the above brief survey demonstrates, even in extreme circumstances, courts may be inclined to enforce the agreements made by the parties. In considering the enforceability of contract obligations which may be impacted by the current COVID-19 crisis, the following is appropriate:

  • Carefully review the contract at issue, including any force majeure, indemnification, cancellation, or fee-shifting provisions, and other requirements to comply with all laws and government directives.
    • Do not make decisions under the assumption that the contractual provisions no longer govern “because of the coronavirus situation.”
  • Monitor the rapidly changing circumstances surrounding the coronavirus pandemic, and continual to reevaluate your intended actions.
    • The timing of the imposition of (and ultimate lifting of) various government directives may be critical to the evaluation of the facts pertaining to your contract.
  • Keep highly detailed business records that chart all of the pertinent facts.
    • Meticulous records should be kept regarding the impact on your business, and, in certain cases, such records should be updated on a day-to-day basis.
  • Consider practical solutions for the amicable resolution of potential or developing contract disputes.
    • Communicate with the other party to the contract so as to enjoy, if possible, the benefits of early intervention and a quick and equitable resolution of the dispute.
  • Review the parameters of your insurance coverage.

While the current upheaval brought about by the coronavirus pandemic may support an impossibility defense to a breach of contract claim, the contract at issue, as well as all of the surrounding circumstances and a myriad of variables, will ultimately determine the likelihood of success.

Should you have any questions concerning this article, please feel free to contact Kenneth L. Moskowitz at klm@bmk-law.com or (973) 376-0909, ext. 1112; or Michele-Lee Shapiro at mshapiro@bmk-law.com or (973) 376-0909, ext. 1130.

* Mr. Moskowitz is a founding partner of Brown, Moskowitz & Kallen, P.C. He is a litigator with extensive experience in a broad range of civil and criminal matters. Ms. Shapiro is counsel at Brown, Moskowitz & Kallen, P.C. She is a litigator representing clients in diverse civil matters, including complex contract disputes.

[1] See Brown, Moskowitz & Kallen P.C.’s Alert, “COVID-19 and Force Majeure Clauses,” published on March 26, 2020, for a discussion of the application of force majeure provisions: https://bmk-law.com/covid-19/covid-19-crisis-and-force-majeure-clauses

[2] Of course, where the performance is literally impossible due to the ramifications of a catastrophic event, such performance should be excused. See, e.g., Bush v. Protravel Int’l., Inc., 192 Misc.2d 743, 752 (Civ. Ct., Richmond Cty. 2002) (refusing to grant summary judgment in favor of travel agency seeking to strictly enforce cancellation terms of contract, where client failed to cancel her trip until September 27, 2001, citing government actions of declaring and enforcing a state of emergency in the City, and the disabled communications in New York City after September 11 terrorist attack. The court noted that, if plaintiff could establish the objective impossibility of timely cancellation of the trip in accordance with the contract at trial, she would be entitled to a reasonable suspension of her contractual obligation to cancel the trip within a certain time period, “if not [also entitled to an] outright excuse of her untimely cancellation”).

[3] See, e.g., Flathead-Michigan I, LLC v. Penninsula Development, L.L.C. , 2011 WL 940048 (E.D. Mich. 2011) (denying leave to amend affirmative defenses to include, among other things, impossibility and impracticability defenses, holding that the global economic downturn of 2008, which caused financial hardship to the contracting party, did not satisfy the standards of the impossibility and impracticability equitable defenses so as to excuse nonpayment of certain loan obligations, and reasoning that the state of the market is a risk that the parties undertake when they enter a contract).

[4] OWBR LLC v. Clear Channel Communications, Inc., 266 F. Supp. 2d 1214, 1224 (D. Haw. 2003) (i n litigation after September 11, 2001, the District of Hawaii held that, even where the force majeure clause in the governing contract specifically addressed terrorism, a company that breached a resort reservation agreement by canceling an event that was scheduled to occur in February of 2002 — five months after the terrorist attacks — could not be excused from its performance under either the force majeure clause or the doctrine of impracticability, rejecting the defendant’s arguments that fear and uncertainty, as well as poor economic conditions, made the event inadvisable so as to constitute impracticability of performance or to fall within the language of the force majeure provision. The court reasoned that permitting “fear and uncertainty” to excuse performance under a contract “would no longer provide any stability and predictability to commercial transactions”).

[5] See, e.g., Seitz v. Mark-O-Lite Sign Contractors, Inc. , 210 N.J. Super. 646 (Law Div. 1986) (holding that a sign company’s breach of a contract was not excused by the doctrine of impossibility where the sign company’s only expert sheet metal worker was hospitalized and rendered indefinitely unable to work; the court reasoned that nothing in the contract contemplated performance only by the laborer at issue, and the nature of the contractual duty was not so personal as to render it nondelegable).

[6] Days Inn of America, Inc. v. Patel , 88 F. Supp. 2d 928 (C.D. Ill. 2000) (the closure of a highway leading to a motel did not render it impracticable for the motel’s franchisee to comply with his obligations under the franchise agreement to meet the required quality assurance standards to keep the motel clean and maintained, even where the bridge work and road closure precluded customers from renting rooms in the motel for three months).

[7] Portnoy v. Omnicare Pharmaceuticals, Inc. , 2004 WL 1535780 (E.D. Pa. 2004) (granting summary judgment to the property’s trustees and holding tenant liable to pay rent. The court found that the premises were usable and were, in fact, being used for the business purpose of the tenant, and the ability to attract clientele was a risk every business undertakes).

[8] Dowlatshahi v. Motorola, Inc., 970 F.2d 289 (7th Cir. 1992) (Seventh Circuit reversed the District Court’s conclusion that the general manager’s employment contract terminated in 1979 when the performance of the contract became objectively impracticable, and the plaintiff was permitted to prosecute his claims, which rested on proving that he remained the active general manager of the U.S. company during the extraordinary circumstances).

[9] 7200 Scottsdale Road General Partners v. Kuhn Farm Machinery, Inc. , 909 P.2d 408, 409 (Ct. App. Div. 1 1995) (European participants who were supposed to attend a convention refused to travel to the U.S. and the organizer canceled the event. The resort sued the organizer for failing to pay for the facilities. The Court found that the risk to air travel posed by the Gulf War rendered the convention uneconomical but not impossible, and rejected a theory of “apprehension of impossibility.”)

This article is for informational purposes only and is not intended to constitute, and does not constitute, legal advice.

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