Who bears the risk if a contract can’t be fulfilled?

Despite ongoing efforts to contain the COVID-19 pandemic, economic disruptions to the U.S. economy are likely to grow over the coming weeks and months. Travel bans could affect performance of international delivery of goods, employees are working remotely, business conferences are being postponed, and the suspensions of sports seasons and tournament cancellations at all levels of play could impact advertising contracts.1 Amidst these uncharted waters, it is important for businesses to review any contracts they believe could be affected by these disruptions.

This article provides guidance on a business’s ability to classify the COVID-19 pandemic as a “force majeure” event and whether the COVID-19 pandemic could provide a valid defense to non-performance under the doctrines of frustration of purpose, impossibility, and impracticability. Finally, it concludes with some practical advice for the days to come.

“Force Majeure” Clauses

A force majeure event refers to unexpected external circumstances that prevent a party to a contract from meeting their obligations. This clause is often found in the “fine print” of a contract. In general, Virginia courts interpret and apply express force majeure provisions according to their specific language. Yet, when an agreement does not contain a force majeure provision there is normally no basis for a force majeure defense.

In most cases, the existence of a force majeure clause allows a party to:

  • cancel the contract;
  • suspend performance until the force majeure event has abated; or;
  • excuse nonperformance of the contract, in whole or in part.

If the clause includes an exclusive list of qualifying events, the relevant event must fall within the scope of a listed item. Applying this idea to the current situation, if the contract specifies “pandemics,” “disease,” or “national emergency” as a force majeure event, the party would likely have an argument that the COVID-19 pandemic qualifies under these events.

For clauses including a non-exclusive list, the event in question must either be included on the list or must be of the same kind or nature as the expressly listed events.

Non-performance of Contract in Virginia

Although Virginia cases on force majeure clauses are sparse, other states like New York have narrowly construed these types of clauses and will only excuse a party’s non-performance if the event that caused non-performance is specifically identified in the contract.2

Ultimately, if your contract contains a force majeure clause, it also likely specifies a procedure that you must follow to preserve the claim. An example of such a procedure is advance notice to the other party about your intent to invoke the force majeure clause.

The clause may also impose certain duties on both parties once a party asserts relief under the clause. For instance, the non-breaching party may have a duty to mitigate any damages sustained as a result of non-performance.

It is imperative that you strictly abide by the terms of your contract when asserting your rights under the force majeure clause.

Impossibility and Frustration of Purpose

If your contract does not contain a force majeure clause, Virginia courts have still been willing to excuse non-performance or delay on the basis of the doctrine of impossibility of performance.

Aside from the express provisions of a contract, Virginia courts have inserted an implied contractual term that each party will be able to perform his or her contractual obligations. Parties often enter into a contract on the assumption that something essential to performance will continue to exist. Therefore, Virginia courts may insert an “implied condition” that, if before the time for performance and without the default of either party, the particular thing ceases to exist or becomes unavailable, the contract shall be dissolved and the parties excused from performing it. In a similar vein, Virginia courts will not require that a party violate applicable law in order to perform under a contract.

Federal courts sitting in Virginia have considered the impossibility doctrine where a theater’s electrical power was cut out prior to the performance of a popular opera tour,3 and where the use of real estate under a lease is later prohibited by a zoning regulation.4

It is possible that a party’s ability to perform under a contract may be deemed “impossible” if the underlying contract depended on circumstances such as (a) governmental prohibitions on domestic or international travel by common carrier; or (b) the cancellation of the underlying event (trade show, athletic event, etc.). Ultimately, this doctrine is inherently factual and its applicability will depend on the circumstances of your particular case.

Practical Considerations

If you believe any of your contracts could be affected by the COVID-19 outbreak, we recommend the following measures:

  1. Identify the “choice of law” provision in the contract. A “choice of law” provision allows the parties to agree that a particular state’s laws can be used to interpret the agreement, even if they live in a different state, or if the agreement was signed in a different state.
  2. Review and analyze the exact language of the force majeure clause to see whether the claimed event indeed qualifies as a force majeure event as specified under the contract. Remember to check the fine print.
  3. Assess whether there is a link between COVID-19, the force majeure clause, and non-performance.
  4. If the contract contains a force majeure clause, make sure to comply with the contractual terms provided to preserve your ability to invoke that clause (notice provisions, mitigation of damages, etc.).
  5. Insist the party claiming force majeure provide (a) evidence of the circumstances that are allegedly preventing performance, and (b) regular updates regarding its efforts to resume performance and/or mitigate the impact of non-performance, where appropriate.
  6. Consider negotiating a written amendment to the contract to reflect a commercially sensible resolution.

Woods Rogers has a Pandemic Response Group of attorneys who are monitoring the COVID-19 situation as it unfolds. This group will report quickly on obligations, potential liabilities, and legislative actions in a range of different practice areas—from commercial litigation to contract law, real estate and construction law, cybersecurity, and labor and employment matters. We stand ready to assist our clients in these difficult times. 

Please contact the Pandemic Response Group co-chairs Brian Johnson and Josh Long with questions and concerns.

Read more legal updates on COVID-19 from Woods Rogers attorneys.

Footnotes and Sources:

  1. Barret Sallee, Coronavirus updates: NCAA cancels championship competition for all winter and spring sports, CBS Sports (March 12, 2020), https://www.cbssports.com/college-football/news/coronavirus-updates-ncaa-cancels-championship-competition-for-all-winter-and-spring-sports/
  2. In re Cablevision Consumer Litigation, 864 F. Supp. 2d 258 (E.D. N.Y. 2012).
  3. Opera Co. of Bos. v. Wolf Trap Found. for Performing Arts, 817 F.2d 1094, 1103 (4th Cir. 1987) (remanding case to determine “whether the possible foreseeability of the power failure in this case was of that degree of reasonable likelihood as to make improper the assertion by Wolf Trap of the defense of impossibility of performance.”).
  4. Kang v. Roof, 24 Va. Cir. 193 (1991) (excusing performance under the lease because there was no serviceable use of the premises after application of zoning regulations)