In 2022, looking back on two years dominated by Covid-19, will parties in contract litigation still be able to make the argument that the pandemic was unforeseeable? Probably not. Since early 2021, with Covid-19 the new normal and the coronavirus feeling a lot less “novel,” courts have increasingly expected parties to have adjusted to pandemic-related issues—from supply chain disruptions to the challenges of remote work. So, for those still wishing to explore such defenses, careful factual research and analysis early in a case will be more important than ever.
Parties raising pandemic-related defenses to breach of contract claims should consider three main keys to analysis. These apply whether a party’s defenses are based on force majeure contract provisions or arise from arguments outside the contract’s language, like impossibility of performance or frustration of purpose. First, as always, the contract language governs. Second, any excuse for a party’s breach must have a clear causal link to the party’s failure to perform. And third, in most cases, the event that caused the breach must have been unforeseeable at the time of contracting.
Terms and Conditions: Force Majeure Clauses
Force majeure clauses in contracts are difficult to invoke. While the events listed in a force majeure clause vary from contract to contract, courts generally require that a force majeure event be both beyond the contracting parties’ control and unforeseeable at the time the contract was signed. Thus, in the Covid-19 context, a court will consider whether the parties did or could have foreseen the pandemic at the time of contracting.
Force majeure clauses can give parties some relief from performing, depending on their wording. This relief can be limited. For example, commercial leases frequently have carve-outs that require the tenant to pay some rent even under the circumstances of a force majeure event. Courts generally enforce such carve-outs, meaning that even parties who are successful in invoking a force majeure clause can still be required to meet the majority of their contract obligations if their contract says so.
While it is generally an easier process for a party defending against a breach claim if the word “pandemic” or “epidemic” is explicitly listed as part of a force majeure clause, it also is a double-edged sword. Some courts have found that the parties’ ability to name a risk—like a pandemic or a government shutdown risk—in a force majeure clause means that the risk was not only foreseeable at the time of contracting, but actually foreseen, defeating other defenses to nonperformance, such as impossibility of performance or frustration of purpose.
Other Contract Defenses and Foreseeability
Other defenses a party might raise against a breach of contract claim may also rely on an argument that the unprecedented circumstances of the pandemic were not foreseeable, such as impossibility or impracticability of performance (with a similar provision in the UCC’s Section 2-615, and some state statutes), and the even narrower theory of frustration of purpose. Both theories have seen at least partial success for entertainment businesses and restaurants in light of government-ordered shutdowns. This success will likely end as such orders cease.
Increasingly in breach of contract cases, courts have rejected Covid-based defenses on two different types of foreseeability grounds. First, some courts found that while Covid-19 was not itself foreseeable, the fact that a contract partner might find itself in financial straits for some reason was foreseeable, defeating contract defenses like impossibility of performance and frustration of purpose. The precise cause of the financial difficulty did not need to be foreseeable.
Second, courts have begun to find that the coronavirus itself is no longer unforeseeable as a circumstance surrounding contracting. For example, one court decision contrasted an insurance policy purchased in 2019 with its renewal, purchased in 2020, finding that Covid-19 was unforeseeable in 2019—but not in June 2020.
Predictions for 2022
Throughout 2021, companies engaging in contract litigation saw increasing skepticism from courts that Covid-19 was “unforeseeable.” This trend will likely continue into 2022, making it more difficult than ever for parties to defend against breach of contract claims by arguing that their nonperformance was pandemic-related.
For the past two years, force majeure clauses have sometimes provided a defense to parties whose business operations were impacted by Covid-19. But in 2022, expect new contracts to be both written and construed more tightly.
In addition, even if a court agrees that the parties couldn’t have foreseen a pandemic occurring, the court may be more focused on government shutdowns or orders, or simple financial fluctuations or difficulties, as the real cause of nonperformance, which are broadly seen as foreseeable. Courts will continue to focus on causation, and will be more likely to find that other intervening events in the case, rather than the pandemic, are truly the cause of the breach.
Access additional analyses from our Bloomberg Law 2022 series here, including pieces covering trends in Litigation, Regulatory & Compliance, Transactions & Contracts, and the Future of the Legal Industry.
If you’re reading this on the Bloomberg Terminal, please run BLAW OUT <GO> in order to access the hyperlinked content, or click here to view the web version of this article.