March 17, 2020
It depends. First, it depends on whether our courts will ultimately consider the present COVID-19 crisis an “Act of God” or, what is more modernly is considered grounds for asserting either the “impossibility” or “frustration of purpose” defenses. Second, it depends on whether your contract already allocates the risk of such widespread illness to one party or the other. Such risk allocation often occurs in “force majeure” clauses. In 1946, the California Supreme Court held, “‘Force majeure,’ or the Latin expression ‘vis major,’ is not necessarily limited to the equivalent of an act of God. The test is whether under the particular circumstances there was such an insuperable interference occurring without the party’s intervention as could not have been prevented by the exercise of prudence, diligence and care.” Third, it depends on whether, under the particular facts of your case, a court would find the non-occurrence of such a pandemic and its associated economic disruption a “basic assumption” on which both parties relied in entering into the contract. Finally, it depends on whether you can show the pandemic, the shut-down of travel, quarantining of a large segment of the population, etc. truly made the performance of your contract “extremely and unreasonably difficult,” meaning such performance could not occur without unreasonable “expense, injury, or loss.” Oosten v. Hay Haulers Dairy Emps. & Helpers Union, 45 Cal. 2d 784, 291 P.2d 17. 20 (Cal. 1955) (quoting Restatement (Second) of Contracts § 261 cmt. d).
Given the pandemic has today been declared a National emergency, and both businesses and government agencies are shutting down left and right, it probably meets the definition of an Act of God. Likewise, although you should check, most contracts do not contain clauses requiring parties to continue to perform under such extreme and generally unforeseeable circumstances. Similarly, most contracts are made on the assumption that businesses, modes of transportation, supply chains, would not be shut down or disrupted en masse by a world-wide health emergency. Hence, the biggest deciding factor is likely to be whether you (or the party seeking to be relieved of performance) can show the pandemic made such performance “extremely and unreasonably difficult.” A mere increase in price or the cost of performance, even a large increase, will not suffice. This holds true even if the increased price or cost was triggered by a “fiscal crisis” or regional or national “economic crisis.” Kashmiri v. Regents of Univ. of California, 156 Cal. App. 4th 809, 67 Cal. Rptr. 3d 635, 658 (Ct. App. 2007). Rather, it must be shown that the pandemic made performance “objectively impossible or impracticable.” Hebrank v. Linmar Mgmt., Inc., No. 13-cv-2179, 2014 U.S. Dist. LEXIS 104007, 2014 WL 3741634, at *4 (S.D. Cal. July 29, 2014); see Restatement Second of Contracts § 261 cmt. b (“[F]inancial inability do[es] not usually effect discharge.”). Examples of such objective impossibility or impracticality includes the inability to hold needed meetings or gatherings banned by government decree, the inability to travel or move goods, the inability to obtain needed components or finished goods from overseas suppliers, etc.
Temporary impossibility or impracticality in most instances will only suffice as a temporary excuse for non-performance. In some instances—for example, when “time is of the essence”—temporary impossibility or impracticality will serve as a complete defense.
No two situations are the same. Each situation must be considered in light of its particular facts. Please consult an attorney before you decide what to do.
Author: David A. Robinson, President and Founding Shareholder, Enterprise Counsel Group