Many businesses are severely impacted by the COVID-19 crisis, and as a result may be unable to perform obligations under their signed contracts. If the COVID-19 pandemic is preventing a company from performing its obligations under a contract, can the company avoid liability for breach? The answer may depend on whether the contract contains a force majeure clause.
Force Majeure Clause Defintion
A force majeure clause protects a party against liability for failure to perform the contract, if the failure to perform is caused by circumstances outside the party’s control – so called “acts of God” – and the COVID-19 pandemic certainly fits this definition.
How To Use COVID-19 to Invoke Force Majeure
If the contract contains a force majeure clause, then it can be invoked if the COVID-19 crisis is preventing a party from performing the contract. For example, if the party is required to perform services under the contract and its employees are sick with the virus, then the party may invoke force majeure and notify the other party that its performance is suspended. However, if the party is only required to pay money under the contract, or if the contract does not contain a force majeure clause, then the party will need to consider alternative legal theories in order to excuse performance.
California Special Provisions for Breach of Contract
Under California law, a party may also be excused from performing a contract if performance becomes impracticable. For example, if a party is required to pay money for goods and the COVID-19 pandemic has caused the market price of the goods to drop precipitously, or if a party is required to provide services and the COVID-19 pandemic has caused the cost of providing services to rise precipitously, then in each case the party could incur severe losses by performing the contract. In situations such as these, where performance is possible but has become economically unfeasible, then the party may be excused from preforming the contract on the grounds of impracticability.
Related legal theories include impossibility and frustration of purpose. If the pandemic makes it impossible for a party to perform it obligations under contract, then the party should be excused from liability for breach on the grounds of impossibility. In some cases, the pandemic may cause a change in conditions, so that the very reason for entering into the contract in the first place has disappeared. For example, if a party has entered into a contract to lease space for a public event, and the government has banned all public events, then the very purpose of the contract has been frustrated and the party should be excused from performing on the grounds of frustration of purpose.
In adapting to the new economic environment caused by the COVID-19 pandemic, each company should review its signed contracts with its attorney, and where appropriate consider whether non-performance based on one or more of these legal theories is an option.