As states across the United States close non-essential businesses and countries around the world restrict their borders in response to the COVID-19 crisis, the economic impact of these governmental actions are manifesting. Companies small and large are examining their contracts to determine whether they must still perform what may be burdensome contracts under the circumstances. Alex Spiro examines one key contract provision and two common law doctrines that may excuse nonperformance: force majeure, impossibility, and frustration of purpose. Though each case is highly determinant on the specific contract language and the particular jurisdiction's laws, Spiro explains these broad principles as a starting point to evaluate contract obligations and liabilities.
Alex Spiro is a partner at Quinn Emanuel and is the co-chair of the Investigations, Government Enforcement & White Collar Defense practice.
Quinn Emanuel is a 800+ attorney business litigation firm with 23 offices around the globe, each devoted solely to business litigation and arbitration.
The issues surrounding the coronavirus have thrown businesses and entrepreneurs into uncharted territory. Are you still subject to the same contracts, and what are ways in which you can get out of them or protect against breaches? My name is Alex Spiro and this is TalksOnLaw.
The first contract provision or notion that one needs to consider at a time like this is force majeure, and that basically means a force greater than what one would imagine would happen in the normal course of business dealings. This is a provision that’s written directly into the contract. It says that the performance must be accomplished unless there is something like an act of God, an act of war, or something that massive that interrupts the flow of business. The vast majority of these contracts do not actually write in “pandemic” or “virus,” but there are other examples of the types of acts that occur out in the world in which both sides would be able to argue by analogy that they either apply to these circumstances or they don’t apply to these circumstances. One factor that weighs in favor of being able to get out of a contract under a force majeure provision is the fact that the government itself has closed down businesses for all intents and purposes.
Even if a contract doesn’t have such a provision, there are doctrines such as impossibility and frustration of purpose that could allow a party to get out of a contract. Impossibility is just like it sounds. What it means is basically that the contract obligations as contemplated is just simply impossible. Impossible does not mean harder or more expensive or takes more time or is more difficult. It means actually impossible. So let’s say you’re contracted to perform the task of delivering a million bananas from Guatemala. Let’s say there’s a coup or a fire or something else that occurs in Guatemala that makes that absolutely impossible. You can’t get the bananas any other way. You can’t get those bananas to America by replacement, through more time, through more money, it’s just impossible. That would then allow you to not perform the contract under the doctrine of Impossibility.
Let’s use another example. Let’s say that you’re a supplier of widgets and the widgets require a part that’s made overseas. If the government shuts down the border and you can’t get that part from overseas, it then makes it impossible for you to fulfill your widget orders. If you can’t get that item from another domestic outlet, if you can’t get that item through your own manufacturing, if you can’t get that item any other way and that item is necessary to make the widget, your performance is, in essence, impossible. Now, the other side may argue that if you had spent more money, if you had delayed things, if you had developed contingency plans, you would have still been able to perform and the onus is on you. Courts will ultimately decide these matters on a case-by-case basis.
There’s also the doctrine of frustration of purpose and what that means is as it also sounds, which is that even if it’s not impossible, the purpose of entering into the business relationship is, in essence, frustrated. I think a sports or media example is most relevant to understanding this concept. Let’s say that a professional athlete under contract is able to play in a stadium starting tomorrow. That’s fine, that’s all well and good, it’s not impossible, right? But let’s say the stadium or the team or the league or the media provider or the sponsor says, you know what? That’s true. It’s not impossible to play the game, it’s not impossible to view the game, but it frustrates the purpose that we all entered into these arrangements for because the game was meant to be interactive with a filled stadium and we can’t do that because of a government order. So because of that, the purpose of this is all frustrated, and we don’t want to fulfill our obligations under the contract. The other side may argue that’s not the purpose. The purpose is to play a game viewed and enjoyed by many people, and that between TV and streaming and other ways, that everyone can still enjoy it, and that maybe there are other things and other steps that have to be taken, but that the purpose itself has not been frustrated and the media team and other entities are obligated to continue their performance under the contract.
There has never been a modern pandemic of this nature, and so these issues are new for businesses, for litigators, and for courts, and we’re hopeful that this lesson can give some tools to small and medium businesses in dealing with this crisis. My name is Alex Spiro. Our appreciation goes out to the health care workers and everybody else on the front lines. This has been TalksOnLaw.