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Is Coronavirus "an Excuse for Non-Performance of a Commercial Contract"?


Richard Dodge & Shauna Guner of the Dentons law firm had a very interesting short piece on this, which they kindly agreed to let me repost:

As the coronavirus continues to spread in the United States, we're beginning to witness the commercial effects, such as supply chain disruptions and cancellation of conferences and travel for business meetings. We've been counseling a number of clients who have been faced with these situations, and the question is always the same: Does the coronavirus excuse non-performance under the relevant agreement by either contracting party?

The short answer is that it depends on the specific terms of the agreement and the relevant facts. The first step is to review the terms of the relevant agreement. Does it contain a force majeure clause? This is a clause that excuses non-performance typically where circumstances make performance impossible. The clause could operate to allow the parties to suspend performance or terminate the agreement. The clause may also state a trigger, such as if a certain percentage of attendees are unable to travel to an event, or a government edict or natural disaster makes performance impossible.

Courts construe force majeure clauses narrowly. Under New York law, the party seeking to have its performance excused by force majeure must demonstrate the existence of a force majeure event and that it engaged in efforts to fulfill its contractual obligation but was unable to do so. Ordinarily, the force majeure clause must include the specific event that is claimed to have prevented performance. If the clause also includes a "catchall," courts generally confine it to mean only things of the same kind or nature as the particular matters listed in the agreement. In addition, force majeure clauses apply only to events that neither party could reasonably foresee or guard against in the agreement.

If your agreement does not contain a force majeure clause, or the clause is too one-sided, or for some other reason is not triggered by the coronavirus, that should not end the analysis. The law provides additional defenses to non-performance, namely frustration of purpose and impossibility of performance, that may be available.

Again, using New York law as a reference point, the defense of frustration of purpose is available when a change in circumstances makes one party's performance virtually worthless to the other, frustrating her purpose in making the contract. For frustration of purpose to excuse performance, the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense. Courts limit the doctrine to instances where a cataclysmic and unforeseeable event renders the contract valueless to one party. The doctrine would not apply where performing under a contract would merely cause some degree of financial hardship.

Additionally, the law typically recognizes the defense of impossibility of performance. Under New York law, it applies where the destruction of the subject matter of the contract or the means of performance renders a party's execution of its obligations objectively impossible. The impossibility must have resulted from an unanticipated, unforeseen event that the parties could not have guarded against in the contract.

We also note that the Uniform Commercial Code contains a provision that could come into play for contracts of sale that are disrupted by the coronavirus. Section 2-615(a) of the N.Y. U.C.C. provides that "[d]elay in delivery or non-delivery . . . is not a breach under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid."

Finally, you should consider whether commercial insurance your company may have in place could apply and then provide timely notice thereunder.

Invoking the force majeure clause or the defenses of frustration or impossibility is risky at any time, but even more so when much remains unknown about the coronavirus and most domestic travel hasn't yet been prohibited. We recommend that you seek legal advice, as improperly invoking the force majeure clause or another defense to non-performance could itself amount to a breach of contract, potentially entitling the other party to damages or the right to terminate the contact. Moreover, some contracts require that the party claiming force majeure give timely notice of the occurrence in order to invoke it as a defense to performance.

They will also have a webinar Friday on this subject, and have material posted here (going well beyond just U.S. law). I've also set up a tag on Coronavirus Contract Law and added it to some earlier posts, so you can click here to see what we have on the subject.