Will You be Held Liable During the COVID-19 Pandemic for a Breach of Contract?

Photo Credit: https://www.insidehighered.com/advice/2017/05/18/presidential-contracts-are-becoming-more-complex-and-corporate-essay

By: Ryan Jones
Articles Editor, American Journal of Trial Advocacy

Due to the Coronavirus, or COVID-19, local, state, and federal governments are forcing businesses to close their doors and send employees home.  These unprecedented measures being taken to prevent the spread of COVID-19 have resulted in businesses struggling to perform their contractual legal obligations.  As we continue to see the development of COVID-19 in the upcoming weeks, one thought that keeps lingering is whether or not businesses will be held liable for a failure to perform a contractual obligation due to the pandemic. Put simply, the “answer is, ‘maybe.’”[1]

          The first thing to determine is whether or not your contract has a force majeure clause.[2] If your contract does contain a force majeure clause and it specifically addresses pandemics, quarantines, and government actions, it is likely that one will not be held liable.[3]  However, if your contract does not contain a force majeure clause, things will be more complicated.  Nonetheless, it does not mean that you will be liable.[4]  Liability will depend on whether or not your jurisdiction allows for impossibility and impracticality to be a valid defense.[5]

          As my Contracts professor always said, “planners are winners,”[6] and if you planned with a force majeure clause, then it is likely that you will not be held liable for a breach of the contract during the COVID-19 pandemic.  A force majeure clause is “[a] contractual provision allocating the risk of loss if performance becomes impossible or impracticable, esp[ecially] as a result of an event or effect that the parties could not have anticipated or controlled.”[7]  Many contracts contain specific language that sets out exactly what type of event is considered for a force majeure.[8]  Generally speaking, examples of common events listed as force majeure clauses include natural disasters, acts of terrorism, epidemics, and nuclear wars.  However, sometimes the force majeure clause is vague and uses broader terms such as “acts of God.”[9]  If the contract includes a broader clause that does not specifically include the term “pandemic,” it does not mean that the party will certainly be liable for a breach of the contact. Although, it does add a layer of difficulty.  The party seeking to enforce the force majeure clause will have to prove that the COVID-19 pandemic does in fact fall under “acts of God.” After ensuring that the contract has a force majeure clause that includes COVID-19, you must now determine whether or not COVID-19 impacted the performance in a way required by the clause.[10]  Examples of these can be impossibility, illegality, or even commercial impracticability.

          If a party can prove that both elements of the clause are met, then the performance of the obligation under the contract is excused without liability.[11] However, often the clause requires that the party invoking a force majeure clause “provide notice to the other party to the contract.”[12] While some clauses provide “express[ed] time limits” or a specific number of days to provide notice, others are vague and use terms such as “promptly.”[13] If the clause uses broad terms, this could potentially result in extensive arguments as to whether or not the party seeking to enforce the clause breached the contract. Furthermore, when providing notice “it is not enough that the entire world may be aware of the natural disaster that has occurred.  If the contract specifies that notice must be given[,] . . . then the party must be diligent” in providing notice.[14] Regardless whether the clause is vague, failure to comply with the notice requirement may result in the party waving their force majeure defense.[15]

          In the absence of a force majeure clause in a contract, one still might be able to successfully bring a force majeure defense under common law.  Under common law, it is well established that “when loss is proximately caused by an act of God which is not foreseeable, the [p]etitioner may not be liable for failure to effectuate the performance of a contract.”[16]  The real question is what constitutes an “act of God” under common law.  In Louisville & N.R. Co. v. Finlay,[17] the court defined an “act of God” as an “intervention of such an extraordinary, violent and destructive agent, [that] by its very nature raises a presumption that no human means could resist its effect.”[18]  Here, the court said that due to the “act of God” it had become impossible for a party to perform their obligations under the said contract.[19] The Second Restatement of Contracts § 261 in agreement, provides that when “a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption of which the contract was made, [the] duty to render the execution of the contract is discharged.”[20]

          However, some courts refuse to accept the impossibility or impracticability defense, rather they hold that “‘[w]here one by his contract undertakes an obligation which is absolute, he is required to perform within the terms of the contract or answers in damages, despite an act of God, unexpected difficulty, or hardship, because these contingencies could have been provided against by his contract.’”[21]  The rationale behind this idea is that the party bringing the impossibility or impracticability defense had the opportunity to contract around the “act of God,” but that party failed to do so.[22]  Nevertheless, courts have provided an exception to this rule.[23] Generally, “where the act or thing contracted to be done is subsequently made unlawful by an act of the Legislature, the promise is avoided.”[24]  Therefore, in jurisdictions where impossibility and impracticability are not valid defenses, unless new legislation has been enacted which would make the performance of the contract illegal, the breaching party will be held liable, regardless of the circumstances.

          As a society, we throw around the term “impossibility” quite frequently, but what does the legal definition of impossibility actually mean?  The old case of Jersey Ice Cream Co. v. Banner Cone Co.,[25] is one of many examples.  Banner Cone Co. entered into a contract with Jersey Ice Cream Company for the shipment of one million ice cream cones.[26] However, the government placed a wartime restriction on one of the main ingredients in the ice cream cones after the parties entered into their contract.[27]  Therefore, Banner Cone Co. was unable to fully execute their obligation of providing Jersey Ice Cream Co. with one million cones.[28]  This resulted in Banner claiming that it was impossible to fully execute the contract without breaking the law.[29]   The court ultimately held that the impossibility exception applied because if Banner was forced to comply with the contract, then it would be breaking the new law because the law came into effect after the execution of the contract.[30]  Some may make the argument that the situation with the ice cream cones and today’s COVID-19 pandemic are analogous.  The government is forcing the close of businesses which results in these businesses not being able execute their contracts without breaking the law.  Thus, by comparison there is a possibility that a party bringing an impossibility defense could succeed due to the government’s mass closures of nonessential businesses.

          The best thing to do during your quarantine is to read your contract thoroughly and determine if your contract includes a force majeure clause.  If it does, then it is likely that you will be excused from the performance of the contract, without being liable to the other party, that is, if you satisfy the notice requirements.  However, if there is not a force majeure clause, then determine what your jurisdiction says about impossibility.  If your jurisdiction allows for an impossibility or impracticability defense, then it is likely that the COVID-19 pandemic will be considered an “act of God.”  Overall, one thing to take away from this pandemic, is that when contracting, always contract for the unexpected. And if you do, you will be a “winner” in Professor Stone’s book.

[1] Larry Donahue, Using a Force Majeure Clause to Re-Negotiate with Vendors and Landlords in Light of the COVID-19 Pandemic?, Law 4 Small Business (Mar. 20, 2020), https://www.l4sb.com/blog/using-force-majeure-to-re-negotiate-with-vendors-and-landlords-in-light-of-the-covid-19-pandemic/.

[2] Id.

[3] Id.

[4] M. Jansen Voss, Force Majeure, Acts of God, Impossibility of Performance, And The UCC: Avoiding (And Enforcing) Contractual Obligations During the Coronavirus Pandemic, Christian & Small Att’ys & Couns., (Mar. 20, 2020), https://csattorneys.com/force-majeure-acts-of-god-impossibility-of-performance-and-the-ucc-avoiding-and-enforcing-contractual-obligations-during-the-coronavirus-pandemic/.

[5] Id.

[6] Quote attributed to R. Thomas Stone Jr., Professor at Cumberland School of Law.

[7] Force Majeure, Black’s Law Dictionary (10th ed. 2014). 

[8] Jennifer Sniffen, Symposium, In the Wake of the Storm: Nonperformance of Contract Obligations Resulting from a Natural Disaster, 31 Nova L. Rev. 551, 555 (2007).

[9] Id.

[10] Id. at 554.

[11] Id.

[12] Id. at 557.

[13] Id. at 567.

[14] Id.

[15] Id.

[16] Ala. Dep’t of Pub. Health v. Lee, 236 So. 3d 863, 872 (Ala. Civ. App. 2017).

[17] 233 Ala. 128, 128 (Ala. 1939).

[18] Louisville & N.R. Co., 233 Ala. at 132.

[19] See id. (stating that “the undisputed evidence show[ed] that . . . the damage [] occur[ed] as the proximate result of an act of God.”).

[20] Restatement (Second) of Contracts: Discharge by Supervening Impracticability § 261 (Am. Law Inst. 1981).

[21] Madison Cty. v. Evanston Ins. Co., 240 F. Supp. 3d 1232, 1277 (N.D. Ala. 2018) (quoting Silverman v. Charmac, Inc., 414 So.2d 892, 894 (Ala. 1982)).

[22] See id. (stating the party bringing the defense “could have contracted against the contingency[,] . . . yet failed to”).

[23] See Hawkins v. First Fed. Sav. & Loan Ass’n, 291 Ala. 257 (Ala. 1973) (“[T]his court has recognized an exception to the strict rule.”); see also Greil Bros. Co. v. Mabson, 179 Ala. 444, 451 (Ala. 1912) (stating that the “rule has its exceptions”).

[24] Greil Bros. Co.. 179 Ala. at 451.

[25] 204 Ala. 532, 532 (Ala. 1920).

[26] Jersey Ice Cream Co., 204 Ala. at 533.

[27] Id. at 532.

[28] Id.

[29] Id.

[30] Id. at 533.

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