As the shock of extreme social distancing and shelter in place-type orders begins to settle, many are wondering about the economic fallout of the coronavirus pandemic. The world certainly feels like it’s stopped spinning normally, but does that mean that you can hold off on paying your rent? Does it mean you can get out of the service contract you just signed?
Well – and we apologize for the frustrating legal answer here – it depends. There’s no one-size-fits-all explanation for the legal impact of COVID-19, but there are some general rules we can share with you.
Here’s a quick primer on how this stuff all works.
Maybe your contract contains a “force majeure clause.”
First, it’s important to know whether the contract you’re talking already planned for things to go haywire.
—نDon’t Come Back Without A Warrant, Dog (@BarkingBarister) March 19, 2020
Many contracts contain what is known as a “force majeure clause,” which some people refer to as an “Act of God” clause. These are specific clauses written into contracts that allow the cancelation of all or part of a contract in the event some unanticipated catastrophe occurs. If your contract contains one of these clauses, then a court would look to see precisely what it says, as well as what it means in the context of your contract.
Most force majeure clauses list the kinds of events that would operate to nullify the parties’ obligations– (such as war, riots, invasion, famine, civil commotion, extreme weather, floods, strikes, fire, government action), and then end with something like, “… or a similar force majeure event,” to clarify that the list isn’t meant to be exhaustive.
In all likelihood, even if your contract does contain a force majeure clause, “global pandemic” isn’t one of the items specifically listed. As one lawyer pointed out, there’s bound to be some debate over whether the coronavirus pandemic counts as the kind of force majeure event that would void contractual obligations.
Fun fact for non-lawyers: a significant number of commercial contracts suspend obligations that cannot be met due to an “act of God.” This is a real thing. I am not making it up. And we’re going to be fighting in courts for the next decade over whether a virus is an act of God.
— Ryan Clinton (@ryanclinton) March 19, 2020
Although lawyers can be counted on to make even the most absurd arguments on their clients’ behalves, it’s tough to imagine any court ruling that a global pandemic does not constitute a force majeure event. Indeed, as another attorney pointed out, if this doesn’t count, then what the hell would?
Fun fact for lawyers – You should not be in court at all, if the clause is in the contract, it should be followed. If a virus is not an act of God, then the clause should never be used in another contract. It is worthless.
— Craig Summerlin (@CraigSummerlin1) March 20, 2020
Determining that a force majeure event occurred, though, isn’t the end of the analysis. A party seeking to get out of its obligation based on the coronavirus outbreak would also need to prove that the pandemic was unforeseeable, and that it caused performance to become impossible.
Forseeability is all about timing. Certainly, if we’re talking about, say, a wedding reception booked last June for a wedding to take place in March 2020 – then COVID-19 is unquestionably an unforeseeable event. No one had ever heard of coronavirus last year, so it wasn’t a known risk. However, if we’re talking about a contract for the sale of a case of toilet paper entered into in late February 2020, things are considerably murkier. Likely though, most contracts entered into prior to mid-February 2020 would likely consider the coronavirus pandemic an unforeseeable event.
Lastly, to cancel a contractual obligation (or an entire contract), the performance must be rendered impossible (or at least really, really difficult) because of the force majeure event. So, if we were talking about a contract for a concert pianist to play at Carnegie Hall with the New York Philharmonic, it’s pretty clear that the pandemic will render performance impossible. By contrast, if we were talking about a novelist who contracted with a publisher to deliver chapters of a new book, coronavirus would not directly impact the author in a way that’s likely to cancel the contract. If the parties disagreed as to whether performance was possible, a court would make the determination; given the scope of the fallout of the coronavirus outbreak, courts will likely be answering this portion of the force-majeure question for years to come.
What if your contract doesn’t have a force majeure clause?
If your contract was a simple one, or just didn’t include a specific force majeure clause, the outcome may still be the same. Courts will apply the common-law concepts “impossibility,” “impracticability,” and “frustration of purpose,” and thereby render contracts unenforceable in response to catastrophic events.
Courts tend to be pretty strict with application of these concepts – but again, the seriousness of the Coronavirus outbreak may well be enough to qualify under even the most stringent legal analysis. When performance is “impossible,” a non-performing party will be relieved of their obligation; back to our example of the concert pianist. He literally cannot give a concert if the orchestra cannot play, the audience cannot attend, or the hall cannot open. That’ll work to get both sides out of the contract.
Impracticability focuses more on the economic fallout of an event. For example, let’s say you own a business that sells hand sanitizer and you contracted with a buyer. However, due to the virus outbreak, you could still buy hand sanitizer, but it would cost $1,000 per bottle. No court is going to make you bankrupt yourself in order to make good on your contractual obligations, because it makes no commercial sense to do so.
Frustration of purpose is another get-out-of-contracts tool. This is what a party would claim when it’s technically possible to perform on a contract, but when doing so just makes no sense at all. So if, say, a skywriter had been contracted to write an advertising message in the sky above Coachella. He might still be able to write the message, but without Coachella happening, there’s no point in doing so. A court would likely nullify any obligation to write the message. [Fun fact of my own here — the main case dealing with frustration of purpose comes from English law. Someone rented an apartment along the parade route in order to have a good view of the new king during his coronation procession. The king, however, died before being crowned, so performance on the contract was “possible” but “frustrated.” It’s widely known as the “coronation case” in legal circles… which seems unnervingly close to “corona” if you ask me.
Of course, with any of these defenses to non-performance, there’s always ancillary legal issues of money. If one party gave a deposit, do they get that deposit back? What about other collateral financial fallout? That’s where lawyers and courts come into play. Or at least that’s where they will once the courts reopen.
[Image via David Dee Delgado/Getty Images]
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