Many businesses are facing difficult questions in light of the state of emergency caused by COVID-19. A common issue running through many of these questions is to what extent contracts are enforceable in light of the far-reaching consequences of COVID-19. Parties may seek to avoid or obtain relief from performing their obligations under contracts in several ways. Two common ways that may arise in relation to COVID-19 are the invocation of what are known as “force majeure” provisions or the doctrine of “frustration”.
Some contracts have what are known as “force majeure” clauses. These are provisions that excuse a contracting party from performing the contract when something like an “act of God” prevents performance. The particular language of the clause will determine how broad or narrow this protection will be. When disputes arise about whether something constitutes a force majeure, that is a question of fact to be determined on a case by case basis.
For many businesses, though not all, it will be easy to establish that the impact of COVID-19 constitutes a disruption to their business. If a standard force majeure clause exists in the contract, many businesses will be able to take advantage of it to delay performance, including payments. The exact language of the clause and caselaw interpreting such language (which supports interpreting the protection narrowly) will be key to assessing the scope of any potential protection.
Determining whether the right exists does not end the analysis. Whether force majeure should be invoked depends in part on whether temporary relief is the appropriate remedy. If the business needs permanent relief from performing the contract, force majeure may not be the best remedy to seek. In those instances, the party seeking to avoid performance of a contract may rely on a doctrine known as “frustration”.
If the changes to the business brought about by COVID-19 are so radical that performance of the contract would mean something very different than what the parties contemplated at the time they made their agreement, the purpose of the contract may be frustrated. In that situation, the contract comes to an end, in contrast to the temporary relief from performance that force majeure would provide. In the case of a lease, for example, it would mean the difference between a delay in rent payments and the end of the lease.
Invoking either doctrine is risky because the burden will be on the party invoking it to establish the foundation for doing so. For businesses facing such decisions, the first step is to consider their objectives in relation to each contract. Carefully assessing the pros and cons of the remedies available and the time and cost involved in reaching those objectives will be an important early step in the decision-making process.
For more information, please contact us.