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Courts Are Excusing Contract Nonperformance Due to the Pandemic

April 8, 2021, 8:00 AM

On March 11, 2020, the World Health Organization declared Covid-19 a pandemic. Eight days later, California became the first state in the U.S. to issue a stay-at-home order, which mandated that all residents remain confined except to go to an essential job or shop for essential needs.

Since then, an evolving patchwork of federal, state, and local government shutdown orders and travel restrictions has challenged the ability of businesses to comply with contract obligations created prior to the outbreak of the virus.

In the last few months, courts increasingly have recognized the contract defenses of force majeure, impossibility/impracticability, and/or discharge by supervening frustration of purpose to excuse contract obligations affected by ripple effects of Covid-19.

Force Majeure

Force majeure clauses are often included in commercial contracts to excuse a party’s performance hampered by various mutually agreed-to events such as fires, hurricanes, and terrorist attacks. Because it is not possible for parties to foresee and list every possible impediment to contract performance, courts often must decide whether the alleged triggering event fits within the general scope of the relevant force majeure clause.

In February, the Southern District of New York found that the Covid-19 pandemic constituted a “natural disaster,” sufficient to trigger a force majeure provision in the parties’ contract. The parties in JN Contemporary Art LLC v. Phillips Auctioneers LLC entered into an agreement in June 2019 to govern the auctioning of a painting that was scheduled to take place in May 2020.

The contract contained a force majeure provision that permitted Phillips to terminate the agreement without liability “for circumstances beyond our or your reasonable control, including, without limitation, as a result of natural disaster, fire, flood” and several other possible contingencies, none of which included an epidemic or a pandemic.

After Covid-19 swept through New York last spring, Phillips terminated the agreement to auction the painting and JN sued for breach of contract. Because the court found that the pandemic fit within the general parameters of a natural disaster, it concluded that Phillips properly terminated the agreement and dismissed JN’s breach of contract claim.

Impossibility or Impracticability

The doctrine of impossibility or impracticability has evolved to excuse contract performance in certain circumstances due to what are deemed unexpected and radically changed circumstances.

To make out the defense of impracticability, businesses will generally need to show: 1) There was a contingency, the non-occurrence of which was a basic assumption underlying the contract; 2) the risks associated with the contingency were not assigned to either party; and 3) the promisor was not responsible for the difficulties in performance.

The impossibility/impracticability defense has been addressed in several recent putative class actions against airlines premised on flight cancellations due to the pandemic.

For example, in Daversa-Evdyriadis v. Norwegian Air, the U.S. District Court for the Central District of California dismissed a putative class action, alleging that Norwegian Air breached its duty to carry customers under the operative general conditions of carriage (GCC) contract.

The court decided that the government travel ban between the U.S. and Europe rendered performance impracticable. The court based its ruling in part on Section 264 of the Restatement of Contracts governing impracticability of performance prevented by government regulation or order.

Frustration of Purpose

The defense of frustration of purpose may also be available to excuse performance when an unanticipated change in circumstances has defeated the primary purpose of the contract for one of the parties. Unlike impracticability, there is no need to show any impediment to performance to establish a frustration of purpose defense.

Last month, a court in Massachusetts found that a commercial tenant’s obligation to pay rent had been discharged where the purpose of the lease had been frustrated by the effects of the pandemic. The tenant in UMNV 205–207 Newbury LLC v. Caffé Nero Americas Inc. closed its doors and stopped paying rent in March 2020 after Massachusetts barred restaurants from allowing on-premises consumption of food or drinks. The landlord responded by terminating the lease and bringing a breach of contract action.

The court in Caffè Nero found that Massachusetts’ Covid-19 restrictions prevented Caffè Nero from achieving the primary purpose of the parties’ agreement in light of the fact that the lease mandated that the premises could only be used to operate a café with a sit-down restaurant menu. As such, the court found that the tenant was not in default under the lease.

While not universal, these decisions may offer some measure of relief to businesses struggling to comply with contract obligations that have become problematic because of the pandemic. Consequently, businesses should continue to evaluate the possible applicability of these and other contract defenses to their existing agreements based on the still-evolving consequences of Covid-19.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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John McIntyre is a litigation partner in Reed Smith’s Pittsburgh office. He has substantial expertise litigating and trying complex breach-of-contract matters.