Don't Bet the Business

COVID-19 (Novel Coronavirus) has hit. Entities and individuals in every sector are affected. What if the virus makes your contract difficult? Less valuable? Impossible?

Do you still have to perform at a loss, under circumstances no one anticipated, when doing so is impossible, all as a result of a virus not seen around the globe in the modern age? Disruptions caused by the virus demonstrate how crucial it is to precisely understand your contract in context.

This virus also shows the importance of drafting agreements. Three legal doctrines are relevant when it comes to enforceability: (1) frustration of purpose, (2) force majeure, and (3) impossibility or impracticability of performance.

Frustration of Purpose                                                 

Performance under a contract can be excused for “frustration of purpose.” Frustration of purpose is generally asserted where a change in circumstances makes one party’s performance virtually worthless to the other party to the agreement. Whether this doctrine applies is typically determined by a judge and not a jury.

To prove frustration of purpose, one must prove: (1) the contract must be in the midst of being performed; (2) the frustrated party's purpose in making the contract must have been known to both parties when the contract was made; (3) the purpose must have been basically frustrated by an event not reasonably foreseeable at the time the contract was made, not due to the fault of the frustrated party, and not based on a risk assumed by the frustrated party.

It is not enough that one has in mind a specific goal when he or she made the contract. In contrast, to succeed on this doctrine the object of the contract must be obviously the basis of the contract such that, as both parties understand it, without the purpose the transaction would make little sense. The frustration must be so severe that it is not fairly to be regarded as within the risks that one assumed in the contract.

Force Majeure

A party can also be relieved of a contract based on a force majeure clause. A force-majeure clause relieves a party from penalties for breach of contract when circumstances beyond the party’s control render performance untenable or impossible.

Force majeure clauses are typically narrowly construed. Such a clause will generally only excuse a party's nonperformance if the event that caused the party’s nonperformance is specifically identified. Force majeure events may include: acts of God; acts of a government or the public enemy; natural disasters; fire; flood; epidemics; quarantine restrictions; strikes; freight embargoes; war; acts of terrorism; [or] equipment breakage.

A force majeure clause applies to objective events that directly affect a party’s ability to perform the contract in question, not the ability to make a profit.

Performance Impossibility or Impracticality

The doctrine of impossibility or impracticability may also allow a party to avoid performance of its obligation. There are two types of impossibility—original impossibility and supervening impossibility.

The former is impossibility of performance existing when the contract was entered into, so that the contract was to do something which from the outset was impossible; in contrast, supervening impossibility develops sometime after the contract is formed.

Under either type, contract performance may be excused when at the making of the contract, or thereafter, performance became impracticable due to some extreme or unreasonable difficulty, expense, injury, or loss involved, rather than that it is scientifically or actually impossible. The important question for the doctrine to apply is whether an unanticipated circumstance has made performance of the promise vitally different from what should reasonably have been within the contemplation of both parties when they entered into the contract. Although absolute impossibility is not required, there must be a showing of impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved.

Claims of “economic unprofitableness” are insufficient grounds to invoke the doctrine of impossibility or impracticability.

With the proliferation of the virus, in addition to human and health consequences, there are legal consequences. For contracts already entered into and being performed, the virus shows the importance of understanding the interplay of these three doctrines and what relief they can (but also may not) provide. For contracts still being negotiated and written, the virus illustrates, unfortunately, the need to address foreseeable circumstances on an agreement by agreement basis with precision and specification.

Contracts provisions including these doctrines should be drafted and tailored to ones need and business. That allows contracting parties, especially in difficult or even unprecedented times, to better ensure goals are met and risks properly allocated.

Contracts of any type including these particular provisions can be the strength or weakness of a deal. Plunkett Cooney’s business lawyers want to keep your business moving forward as efficiently as possible. We routinely resolve conflicts for companies dealing with frustration of purpose, force majeure, and impossibility or impracticability of performance clauses.