Thursday, November 26, 2020

COVID-19 May Not Excuse Breach of Contract

Law Matters

Stay-at-home orders, furloughs, business closings and medical issues are all part of the COVID-19 pandemic. For many, economic hardship is real. For others, perceived economic hardship is an opportunity to exploit the situation. The COVID-19 pandemic does not automatically end one’s contractual obligations, but some try to argue it does.

COVID-19 does not create a new contract law. Existing law must be applied to the facts during the pandemic just as before. Under existing law, there are 3 primary legal theories one might argue excuse contract performance due to the pandemic: (1) impossibility of performance/ impracticability of performance; (2) frustration of purpose; and (3) force majeure or acts of God.

Impossibility of performance is a legal doctrine that allows a party to get out of a contract because performance has been rendered impossible. Courts apply the doctrine sparingly, as it is not public policy to allow people to avoid contractual obligations. The key here is the factor rendering performance impossible must not have been known or foreseeable at the time the contract is entered.

If the impossibility is created by the party trying to escape the contract, that party will not be able to rely on the impossibility of performance to escape the contract. The same rationale applies to conditions which a party could have prevented or minimized to allow performance.

Strict construction of the impossibility doctrine by courts is well-established in Florida. A good example is a case with an appliance store tenant. The tenant was unable to obtain property insurance required by its finance company and could not feasibly operate a store as planned without financing. The court ruled unavailability of financing did not make it impossible to operate an appliance store. Inability to obtain financing made operation extremely burdensome, but that was not enough to excuse performance under the lease.

In another case, the court explained that even where performance actually becomes impossible after a contract is signed, the doctrine of impossibility of performance cannot be invoked as a defense if knowledge of the facts making performance impossible was available at the time the contract was entered. In that case, a patient signed a contract requiring arbitration in the event of a dispute with a health care provider. After a dispute arose, the patient sought to avoid arbitration on the ground that the patient lacked the ability to pay the costs of the arbitration. The court confirmed inability to pay was not an unanticipated circumstance, the risk was foreseeable and the doctrine of impossibility of performance would not be applied.

Impracticability of performance is almost the same as impossibility of performance. It generally means performance has become so unexpectedly difficult or expensive that performance should be excused because forcing performance would be akin to unconscionable. This concept often involves a governmentally imposed limitation, which might include forced business closings during the pandemic. Based on the appliance store case discussed earlier, it may not relieve a restaurant tenant of its rent obligation when it can stay open for take-out even though take-out is substantially less than the business it would enjoy during normal operations.

Frustration of purpose is a relative of the impossibility of performance, but takes into account different factors. As with impossibility of performance, frustration of purpose must arise after the contract is entered and must not have been foreseeable. Frustration of purpose means the purpose for which the contract was entered, known to both parties, has been frustrated. Commercial frustration exists where performance is possible but intervening and unanticipated events totally or nearly totally destroy the purpose of the contract.

A leading case on frustration of purpose is one from 1965 in which a packinghouse bought ice-making machines to makes snow-ice for a fresh vegetable packinghouse. The machines were not capable of fulfilling the packinghouse’s needs and the court allowed rescission of the contract because it was entered based on assurances the machines would furnish all the ice needed by the packinghouse.

Acts of God can excuse performance. An act of God is generally one which is so extraordinary and unprecedented that foresight could not guard against it. Negligence or lack of due diligence must not contribute to the manner in which the act of God precludes performance. Acts of God excuse is similar to impossibility of performance. One of the few Florida cases agreeing that an act of God excuses performance was a 1940 Florida Supreme Court case. In that case, Florida Power was excused from providing electricity when a hurricane impacted its facilities and equipment.

Force majeure is similar to acts of God. Force majeure is a rare exception to our inheritance of common law from England. It originated in French civil law and allows a contract clause that excuses non-performance due to a catastrophic event. The catastrophic event or events are listed within the clause and if a listed event disrupts performance, performance is excused. Cases involving force majeure clauses often focus on whether the disruptive event is included in the list of events in the force majeure clause. Force majeure clauses can be broader than acts of God, but are generally applied the same.

The specific facts of each case will determine whether any of these defenses can be used for non-performance of a contractual obligation. One thing is clear, COVID-19 does not automatically excuse a breach of contract. If government action interferes with the  ability to perform or the contractual purpose, it is the government action and not the pandemic that will be examined. We will use the same law we had before the pandemic. COVID-19 does not, by itself, change the law of contract performance.

William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice. 

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