COVID-19: Impossible Contracts and Force Majeure

The COVID-19 pandemic of 2020 – as well as government orders to contain it – have prevented countless people, babysitters to basketball players, from fulfilling their contracts. Are all of these parties legally liable for breaching their contracts? Or are they excused due to this extraordinary event? What about payments made in advance, such as tickets bought for a concert that has now been canceled, or a dorm room leased at a college that is now closed?

This coronavirus is new, but wars, floods, and even other pandemics have upset innumerable contracts over the years. In response, our courts have established a clear set of legal rules – most importantly the doctrines of “impossibility” and “restitution” – to answer these questions. Beyond that, contracting parties can, and often do, “contract around” these legal doctrines by including a “force majeure” clause, which specifies what should happen in case of an “act of god” like the coronavirus.

Impossibility and Restitution

Under the impossibility doctrine, if a party’s contractual performance becomes impossible due to an extraordinary event, she is excused from the contract. The same rule applies if performance has suddenly become so much more difficult and dangerous than expected as to be “impracticable” (meaning effectively impossible). And the outcome remains the same if a new law or government order prohibits the party from doing what she promised; this might be called ‘legal impossibility.’

If a party is excused from her contract on the basis of impossibility, however, that is not the end of the story. Under the doctrine of restitution, which prohibits unjust enrichment at the expense of another, the excused party would have to return any payments received in advance.  The excused party has not breached the contract, but neither has she performed, so it would be unjust for her to keep that money.

Although impossibility is generally given a narrow scope, the COVID-19 pandemic is just the type of event that the doctrine was designed to address. Importantly, whether the COVID-19 pandemic was “foreseeable” does not really matter. For one thing, the types of events that typically give rise to an impossibility defense are natural disasters (acts of god) that have happened many times and will surely happen again, such as fires, floods, or earthquakes. For another, anything and everything is foreseeable, at least to those with good imaginations. Thus, the doctrine does not really require that the extraordinary event be unforeseeable – only that it be extraordinary, which the present pandemic surely is.

Force Majeure Clauses

Impossibility and restitution are default rules that parties can displace through an express contractual term, most notably a force majeure clause. There is no boilerplate force majeure clause, as each one is the subject of negotiation between the parties. That said, they commonly follow a certain pattern that can be illustrated by quoting the force majeure clause at issue in the well known New York case of Kel Kim v. Central Markets:

If either party to this Lease shall be delayed or prevented from the performance of any obligation through no fault of their own by reason of labor disputes, inability to procure materials, failure of utility service, restrictive governmental laws or regulations, riots, insurrection, war, adverse weather, Acts of God, or other similar causes beyond the control of such party, the performance of such obligation shall be excused for the period of the delay.[1]

Force majeure clauses are narrowly construed and only rarely invoked successfully in litigation.

Even so, the COVID-19 pandemic is likely to qualify as a force majeure event under a typical clause that includes terms like “governmental laws” and “acts of god.” As for the former, many states have issued legal proclamations requiring people to stay home and businesses to cease operations. Orders such as these would fall squarely within the force majeure clause, at least for the duration of the order. Once the order is lifted, however, the party would no longer be excused and would have to perform as promised. Also, if a state has made a less-restrictive order, or recommendations without the force of law, that would likely not come within the ambit of “governmental laws.”

Turning to the “acts of god” provision, the question will be whether the COVID-19 pandemic is viewed as akin to other types of natural disasters, like hurricanes, earthquakes, or avalanches. This is a delicate question, and reasonable minds may differ. Some commentators have tentatively suggested that the COVID-19 pandemic would likely not qualify because its severity depends on human action or inaction. Other commentators, likewise tentative, have taken the opposite position.

I expect that the COVID-19 pandemic will likely qualify as an act of god (subject, of course, to the phrasing of the specific clause at issue). An earthquake is still an act of god, whether or not the factory has been built to be earthquake proof. A hurricane is still an act of god, even if it is partially the result of human-caused climate change. And a pandemic is still an act of god, even if it was spread by people flying in human-built airplanes or exacerbated by human behavior (e.g., attending church or taking a cruise). Nor does it matter that pandemics are foreseeable and, in fact, have been predicted. The same is true of all acts of god. (That said, a party to a contract made today, following the start of the COVID-19 pandemic, would not be excused on the basis of this event.)

Finally, even if the COVID-19 pandemic or a government order qualifies as a force majeure event, a party would only be excused under a typical clause if the pandemic or a subsequent order actually “delayed or prevented” the party from performing. In some cases, such as an arena closed by government order, a band that promised to play a concert there is clearly prevented from performing and would thus be excused. In many instances, however, performance would likely not be prevented but merely rendered more difficult or expensive; in those cases, the relevant question would be whether the additional expense or difficulty is so great as to make it effectively impossible for the party to perform.

Drafting for Future Pandemics

This will not be the last pandemic that renders performance more difficult than anticipated. Now that the risk has become salient, parties will include terms like “epidemic” and “pandemic” to force majeure clauses, as many already have and as many commentators now recommend.

From a business perspective, however, things are more complicated. Contract negotiations are dynamic, and counterparties will respond to any request to include “pandemic” in a force majeure clause by, for example, offering a lower price, because they are being asked to bear the risk of nonperformance.

More broadly, the savvy business move may be to delete the force majeure clause and rely on the default impossibility doctrine for protection. Pandemics are top of mind right now, just as terrorism was in 2001, but to insist on those terms in future force majeure clauses is to “fight the last war.” There are countless other disasters that might come to pass and make performance more difficult, from super-volcanoes to meteor collisions. If you try to list all of these in a force majeure clause, they will be interpreted narrowly, and you may well fail to include the one that occurs.[2] On the other hand, a court might view the excision of a force majeure clause as an agreement to accept all risks of nonperformance. There is no clear answer here, other than the exercise of careful legal and business judgment.

ENDNOTES

[1] Kel Kim Corp. v. Cent. Mkts, Inc., 519 N.E.2d 295, 296 n.* (N.Y. 1987).

[2] Id. at 296 (“Ordinarily, only if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused”).

This post comes to us from Professor Andrew A. Schwartz at the University of Colorado Law School.  It is based on his recent essay, “Contracts and COVID-19,” available here.

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