The Impact Of COVID-19 On Parties’ Obligations To Perform Contractual Obligations

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Adler Pollock & Sheehan P.C.

The recent outbreak of the 2019 Novel Coronavirus (“COVID-19”) in the United States has caused many business activities to come screeching to a halt, as many state and local governments issue orders and advisories for residents to stay at home and for any non-essential business activities to be performed remotely.  Construction activity has stalled in many states, performances and events have been cancelled or postponed, and many businesses and venues have had to temporarily shut their doors.  In the midst of this unprecedented disruption, many businesses will need to review their contractual obligations and determine the extent to which they may be liable for nonperformance.  Our office previously outlined the impact of COVID-19 on contracts containing force majeure provisions.[1]  However, in the event that your force majeure clause does not cover an event such as COVID-19 (or your contract does not contain a force majeure provision at all), there may still be legal remedies available to justify nonperformance.  Specifically, the common law doctrines of impossibility, impracticability, and frustration of purpose may provide relief for individuals and entities that realize that they are unable to fulfill their contractual obligations as a result of COVID-19.

The bar for invoking the doctrine of impossibility is high, and parties seeking to utilize this doctrine to excuse nonperformance of their contractual obligations must demonstrate that performance of any such obligations has become objectively impossible.  Unexpected difficulty, expense, or hardship involved in the performance of a contract does not excuse a party from its obligation to perform under the doctrine of impossibility.  However, another doctrine, the doctrine of impracticability, may be invoked when the occurrence of an event does not quite render contractual performance impossible.  The doctrine of impracticability excuses contractual nonperformance when an unforeseeable event that is not the fault of the contracting party occurs and materially changes the nature of a party’s obligations under the contract.  Although it provides a lower bar than impossibility, the impracticability defense is still difficult to prove.

When a supervening event, such as COVID-19, creates a temporary impossibility or impracticability, the contracting party’s duty to perform might be temporarily suspended, but not excused altogether.  This may prove particularly relevant to the measures currently being taken by state and local governments to address the COVID-19 crisis.  To the extent that these measures are reasonably temporary, the doctrines of impossibility and impracticability could be invoked to excuse temporary nonperformance of contractual obligations, which may then resume once the crisis begins to recede.

The doctrine of frustration of purpose might also provide a viable argument justifying nonperformance.  The predominant purpose behind this doctrine is to excuse a party from performing under a contract due to the occurrence of an intervening or supervening event that substantially frustrates the main purpose for which the parties entered into the contract.  Unlike the doctrines of impossibility and impracticability, which concern duties specified in the contract, frustration of purpose concerns the reason a party entered into the contract in the first place.  Applied to the current circumstances, the occurrence of the COVID-19 outbreak and the corresponding state action must frustrate a central purpose of the contract for a party to successfully invoke this doctrine.  A party seeking to invoke this doctrine typically must be able to demonstrate the following factors: (1) the contract has not been fully performed; (2) a supervening event that was not the fault of either party occurred after the contract was made; (3) the nonoccurrence of the event was a basic assumption on which the contract was made; (4) the occurrence frustrated the parties’ principal purpose for the contract; and (5) the frustration was substantial.  Tri-Town Const. Co. v. Commerce Park Assocs. 12, LLC, 139 A.3d 467, 475 (R.I. 2016) (applying Rhode Island law).[2]

Each of the defenses of impossibility, impracticability, and frustration of purpose are difficult to prove, and depend on the language of the subject contract, the specific obligations at issue, and the applicable governing law.  It is therefore imperative that any entity or individual reviewing their ongoing contractual obligations during the present business disruption consult legal counsel before deciding that any of these defenses could sufficiently justify nonperformance of any contractual obligations.

[1] Our prior blog post concerning COVID-19 and force majeure provisions can be reviewed at https://www.apslaw.com/its-your-business/2020/03/12/covid-19-a-force-majeure-event/.

[2] These factors represent the standard employed in Rhode Island; however, these same factors, or substantially similar factors, have been applied in most other states.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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