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  • Writer's pictureDavis Yu

COVID-19’s impact on businesses: Are contracts still legally enforceable?

August 14, 2020



Within a few months, the COVID-19 pandemic severely affected many businesses across the nation. Millions of Americans have been left jobless while businesses struggle to stay afloat and continue to experience economic disruptions and temporary closures especially within the state of California.

Contracts and agreements that have been entered into leave many business owners worrying about their legal obligations and options, as well as what to require from other parties during these circumstances. Certain terms within a contract including a force majeure clause may determine when contractual obligations will be excused or delayed. Even if a force majeure clause does not exist or is inapplicable, principles such as impossibility or frustration of purpose may serve as defenses.


Force majeure clause

Generally referred to as an “act of God,” a force majeure clause may be included within a contract. A force majeure clause delays or excuses a party’s or both parties’ performance of their respective contractual obligations due to an extraordinary occurrence or event beyond their control. The effectiveness of the clause will depend on the exact terms of the contract referring to “force majeure” and the law of the state that governs the contract.


Standard force majeure clauses typically include, but is not limited to qualifying events such as acts of God (e.g., severe weather, tornados, earthquakes, etc.), acts of war or terrorism, labor strikes, epidemic and/or pandemic, or government actions. Other contracts may also include a general “catch-all” phrase such as “any other cause beyond the reasonable control of the party invoking this section.”


California codified this doctrine in Cal. Civ. Code § 3526, which states: “No man is responsible for that which no man can control.” In some jurisdictions, contracts that contain a listing of specific qualifying events excludes events that are not listed. For instance, if a “pandemic” or “government acts” are not specifically listed as a qualifying event, the force majeure clause will not be enforceable despite the current circumstances. California courts, on the other hand, may interpret the clause less narrowly in that a non-listed event may still qualify if it is unforeseeable at the time of contracting. Existing financial hardship or mere inconvenience does not typically excuse performance of a contract unless it involves “extreme and unreasonable difficulty, expense, injury or loss.” Butler v. Nepple, 54 Cal.2d 589, 599 (1960).


The qualifying event must be the direct cause of a party’s or both parties’ inability to satisfy their contractual obligations. Any events within the control of either or both parties including any form of misconduct will not invoke a force majeure clause. There must be an “insuperable interference occurring without the party’s intervention as could not have been prevented by the exercise of prudence, diligence and care.” Pacific Vegetable Oil Corp. v. CST, Ltd., 29 Cal.2d 228, 238 (1946).


Again, it is extremely crucial to carefully review the terms of a contract. The contract may require written and timely notice requirements on behalf of the party invoking the force majeure clause. A contract can have specific terms that will delay and not excuse contractual obligations when certain events occur. Moreover, there may be a provision in which both parties expressly agreed to require performance even during supervening, unprecedented circumstances. Cal. Civ. Code § 1511. It is important to consult with an attorney to carefully review existing contracts to avoid breaches and penalties.



There is no force majeure clause or it's not enforceable: Are there additional defenses?


Should a contract not contain a force majeure clause, the party seeking to excuse performance may be able to assert other defenses.


Impossibility/Impracticability


Under California law, both “impossibility” and “impracticability” are defenses to performance. Contractual duties will be discharged if it is objectively impossible to perform. This does not take into account a party’s inability to perform but rather the inability of the obligation to be completed.


Performance is impracticable when the performing party has experienced: (1) extreme and unreasonable difficulty and/or expense; and (2) its nonoccurrence was a basic assumption of the parties.


Performance may also be excused where “prevented by the operation of law.” Cal. Civ. Code § 1511 (1). With California mandating shutdowns and temporary closures of businesses, parties’ contractual obligations may be delayed until the impossible/impracticable conditions change or may be excused if conditions last for an indefinite period. See Autry v. Republic Prods. Inc., 30 Cal.2d 144, 149 (1947).


Frustration of Purpose


Some courts will discharge contractual obligations even though performance is still possible where the purpose of entering the contract has become valueless or frustrated by virtue of some unanticipated supervening event. The frustration must be so severe or substantial that it is not fairly to be regarded as within the risks that were assumed under the contract. FPI Dev., Inc. v. Nakashima, 231 Cal.App.3d 367, 399 (1991).


For example, a company contracts with a venue in October 2019 to utilize their space for a conference that is scheduled for August 2020. Due to the ongoing COVID-19 pandemic and obvious health concerns, the conference has been cancelled. The company may invoke the frustration of purpose defense. Although the company can still technically utilize the venue, the purpose of the contract (conducting the conference) is now valueless.


The requirements for the defense are typically a high standard to meet. If the intervening event resulting in the defense was foreseeable at the time of entering the contract or if the purpose of a contract has not been substantially frustrated or destroyed, courts have generally held that the defense does not apply.


Conclusion


COVID-19 has massively impacted both large and small businesses across the globe. With unexpected temporary closures of some “non-essential” businesses, supply chain disruptions, and ongoing employee layoffs, businesses are forced to pivot and adapt as they continue to navigate through this unprecedented crisis. To evaluate your options as it pertains to existing contracts in addition to ensuring careful drafting in the face of unexpected events, feel free to reach out to us at (714) 386-7755 or message us on www.dylawcorp.com.



The content within this article is intended for informational purposes only. The article should not be construed as legal advice or a legal opinion based on any specific facts or circumstances. For specific questions related to this article, please consult with a licensed attorney.






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