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    The Lawletter Blog

    CONTRACTS:  Contract Excuses and the COVID-19 Pandemic

    Posted by Anne B. Hemenway on Wed, Jun 17, 2020 @ 11:06 AM

    Anne Hemenway, Senior Attorney, National Legal Research Group

         The economic fallout from the COVID-19 pandemic and the sudden and worldwide shuttering of large and small businesses may be felt for a long time.  One of the resulting issues is the applicability of a force majeure clause, or common-law impossibility, frustration of purpose, or commercial impracticability excuses for contract performance and obligations. Force majeure clauses come into effect when events occurring beyond the control of the parties prevent performance of contract obligations. Some contracts include specific force majeure events that will excuse performance at this time, such as a pandemic (the World Health Organization declared a pandemic on March 11, 2020) or when governmental or administrative action is taken that disrupts or precludes performance under a contract.

         Even if the contract does not have a force majeure clause, a party's performance may be excused due to impossibility or impracticability. Courts recognize that a party's contractual obligations may be discharged under these defenses when the party's performance is prevented by a government order. See Leon County v. Gluesenkamp, 873 So. 2d 460 (Fla. Dist. Ct. App. 2004); see also Fla. Power & Light Co. v. Westinghouse Elec. Co., 826 F.2d 239 (4th Cir. 1987) (contractor excused by impossibility from agreement to remove and dispose of spent nuclear fuel after federal government's discontinuation of reprocessing plant because government's role in nuclear waste disposal was a basic assumption of both parties to contract); Ford Motor Co. v. Ghreiwati Auto, No. 12-14313, 2013 WL 5954488 (E.D. Mich. Nov. 7, 2013) (holding that presidential order prohibiting exports to Syria made performance of dealership agreement between American manufacturer and Syrian dealer impossible and performance was excused).

         If, however, the governmental action was foreseeable, or the secondary impact of the governmental action was already an issue with the parties, the impossibility or impracticability defense may not apply. In Flathead-Michigan I, LLC v. Penninsula Development, LLC, No. 19-14043, 2011 WL 940048 (E.D. Mich. Mar. 16, 2011), the court held that the 2008 economic downturn did not serve as an excuse under the commercial impracticability doctrine. The court concluded that the "downturn" was not totally unforeseeable at the time that the contract was executed and that the state of the stock market and other economic indicators was something the parties typically consider when weighing the risks of the loan agreements.

         In evaluating the applicability of the common-law contract performance excuses, parties must determine whether the governmental action attributable to the COVID-19 pandemic actually prevented performance of the contract obligations and/or destroyed a basic and material assumption of both parties to the contract.

    Topics: contracts, COVID-19, force majeure clause, frustration of purpose, excuse for performance

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