COVID-19 as it affects Non-Performance and Termination Rights under Contracts

By David C. Nelson

Has your ability, or the ability of a counterparty, to perform under your existing business contracts been affected by COVID-19? If so, you are probably wondering if the terms of your existing contracts excuse, whether by delay or cancellation, non-performance by your company or the other party, and whether either party can terminate the contact due to COVID-19. You may also be considering revising your form contracts and negotiating changes to contracts before your business signs them to provide excuses for non-performance, delay in performance, or termination rights due to COVID-19.

The COVID-19 outbreak and resulting governmental restrictions continue to cause businesses to cancel or delay events or the supply of their products and services. As a result, many business owners have questions on the rights and obligations of the parties to a contract.

What is the reason?

If you believe your business needs to assert, or you have been informed by another party to a contract that it needs to assert, non-performance under a contract, your first step is to determine the underlying reason. Is it due to: (a) the President of the United States, a governor, mayor or other governmental authority issuing an order, or a legislative body enacting a law or ordinance that has the effect of prohibiting the party from performing its obligations under the contact; (b) a party’s employees being infected by COVID-19; (c) the inability to hire employees necessary to perform due to COVID-19; or (d) the party’s suppliers or subcontractors asserting they cannot perform as a result of COVID-19?

What is the express language in the contract?

Reviewing and analyzing the express language of the contract is the second step in determining the effect of COVID-19 on the rights and obligations of contracting parties. Non-performance is not favored in business, as evidenced by court decisions. The express words of the contract and statutes are strictly construed by courts.

Contracts often contain clauses providing that a party is not in default of the contract for failure to perform in certain circumstances beyond its reasonable control. Typically, these clauses are titled “Force Majeure” or “Excusable Event” clauses.

“Force majeure” is from the French language and is commonly considered to be an event or effect that cannot be reasonably anticipated or controlled and should therefore excuse performance.

Contract clauses that state something like “A party is excused from performance (or not in default) if there is force majeure” without listing specific causes are usually interpreted by courts to require an event or effect that could not be reasonably anticipated when the contract was signed or controlled after the contract was signed.

Contract clauses sometimes list specific causes (such as “fire”) or an umbrella of causes (such as “acts of God” and catch all provisions (such as “any event or cause whatsoever beyond the reasonable control of the Party so affected”) as excuses for non-performance. Some Force Majeure sections include examples, such as “flood”, “earthquake”, “tornado, “acts of terrorism” or “epidemic”. The examples that can be placed in a Force Majeure section are almost countless.

Scientists and medical doctors considers COVID-19 to be both a disease and a virus. The World Health Organization has characterized COVID-19 as a worldwide pandemic. Whether COVID-19 was meant by the parties to be covered by an express word or clause, such as “disease” or “pandemic” in a Force Majeure clause, or is an “act of God” will be determined by courts in the context of excuse for non-performance.

Even if the Force Majeure clause lists “virus”, “disease” or “pandemic” as an excuse for non-performance, one must also determine if performance could still have occurred, as courts have ruled that economic hardship resulting from the occurrence of the specific Force Majeure word by itself does invoke the excuse for non-performance. The party claiming excuse for non-performance may need to prove it was prevented from performing because of a situation that it could not reasonably have anticipated and that could not be overcome with reasonable effort.

What if the contract does not contain a Non-Performance Clause?

Impracticability of Performance and Frustration of Purpose are two additional potential avenues that excuse non-performance under, or allow termination of, a contract if the contract does not include a specific Force Majeure or similar clause.

Impracticability of Performance

In certain circumstances, absent terms of a contract that would override, a party to a contract can be excused from performance under common law doctrine (court decisions) or by statute due to Impracticability. Courts have ruled that non-performance is excused when unanticipated events cause performance to be impracticable or excessively burdensome and the event was unforeseeable.

Section 2-615 of the Uniform Commercial Code, which with variations is part of the laws of all fifty states, allows a seller of goods to avoid breach of contract for delay in delivery or non-delivery, when performance has been made impracticable by unforeseen circumstance or because of good faith compliance with a governmental order, law or regulation. The cases often require the affected party to give reasonable notice to the other party for non-performance to be excused. UCC Section 2-615 requires the seller to notify the buyer “seasonably” of the delay or non-delivery of goods.

Frustration of Purpose

Frustration of Purpose is a common law doctrine. The underlying requirement for a party to avoid breach of contact for non-performance under this doctrine is almost always that the circumstance was unforeseeable to both parties and if it had been foreseen, entering the contact would not have made sense.

What is Not Impracticability of Performance or Frustration of Purpose

Economic hardship, such as increased production, delivery or other performance costs, will not excuse non-performance for Impracticability of Performance or Frustration of Purpose.

Final Comments

The court decisions on cases involving non-performance for the reasons identified in this article are all fact sensitive.

Keep in mind that a party claiming excuse for non-performance may be required to give notice to the other party and will likely need to perform if and when performance becomes possible. Be aware that a party that claims a right of non-performance and does not perform can be liable to the other party for damages for breach of contract if a court later determines the excuse was not valid.

Before signing contacts, businesses should review the clauses providing excuses for non-performance and, if they are the party providing the goods or services, consider whether it would be beneficial to add “virus” or “epidemic” or similar terms to the clause and the obligation to perform once the excuse for non-performance no longer exists. Each party should also consider a right to terminate the contact in the event non-performance continues for an extended period of time.

A complete analysis of a right to claim non-performance will almost always require research to find applicable Federal and state court decisions based upon similar facts.

For additional information, call 402-392-1250 to speak to Dave Nelson or one of our other business attorneys.