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COVID-19: Contract Default and Defenses to Consider

The uncertainty and economic downturn related to the restrictions set in place to combat the spread of COVID-19 have raised several legal questions. Notably, individuals and business are concerned about the impact the COVID-19 and various stay at home orders will have on their contracts.

The types of contracts impacted by COVID-19 are non-exclusive and range from commercial lease agreements to contracts to supply products to wedding venue/vendor contracts. Much like the spread of the virus itself, COVID-19’s effect on various contracts has not been biased.

Generally, here is what you need to know about your contracts during a pandemic. As a starting point, when reviewing whether COVID-19 restrictions have excused performance pursuant to your contract it is important to review three theories of law: 1) Force Majeure; 2) Impracticability of Performance; and 3) Frustration of Purpose.

The first theory, force majeure, is a clause within a contract that relieves parties from their contractual obligation where performance is prevented due to causes beyond the parties’ control. Examples of causes beyond the parties’ control include large-scale disasters, acts of God and war. Whether or not a force majeure clause within a contract is controlling will depend upon the specific language of the contract and could be affected by various state laws depending upon the parties’ industry and/or the purpose of the contract. To determine whether the specific language, or lack thereof, of your contract will excuse certain performance, it will be important to contact an attorney for contract review.

The second legal theory, impracticability of performance revolves around the concept of “basic assumption” in direct relation to the non-occurrence of performance under the contract. Examples of impracticability of performance include a singer dying before a scheduled performance or the unforeseen illegality of the transaction. The basic assumption within these examples are that the singer scheduled to perform would be alive and at the time performance was required, it would be legal to perform. Relevant here, someone who tests positive for COVID-19 would not be permitted by both health officials and/or government regulations to appear at a public event even if required to appear by a contract, i.e. if it is illegal to go to work, you cannot go to work. This defense against contract performance is fact specific and it will be essential to have an attorney go through your specific facts to determine whether performance is excused.

Finally, the third theory to consider when determining whether your contract performance is excused is frustration of purpose. Frustration of purpose involves a change in circumstances that makes performance of the contract by one party virtually worthless to the other party. In other words, the party’s principal purpose in entering the contract is substantially frustrated by a supervening event that both assumed would not occur. A very simple example of this defense would be an individual who contracted with a homeowner to use the homeowner’s window to watch a parade and then, unexpectedly, the parade was cancelled. Without the parade, the seat in front of the homeowner’s window is virtually worthless to the other contracting party. Obviously, this is an overly simplified example, but the concept can be applied to more complex facts such as parties’ contracting for the use of a wedding venue and then restricted to no gatherings over ten people or a commercial lease agreement that is then restricted by business closures.

In the case of a commercial lease agreement, it is important to answer the question: Does the intervening event actually substantially frustrate the purpose of the lease, or does it just make it less profitable for the tenant to continue operating under the lease? To answer this question, and ultimately utilize the frustration of purpose defense, look to whether the asserting party is still deriving any interest pursuant to the contract. Again, contacting an attorney can be helpful to analyzing your specific fact scenario.