Does the COVID-19 pandemic render contracts unenforceable based on an “act of God”? Contract law is based on the principle that once an agreement is made, performance is required, unless excused by a later agreement. But what happens if neither party had reason to know of an intervening event and no control over it, such as the current pandemic crisis?
Generally, the common law does not provide for shifting the risk of an unforeseen event beyond the control of the parties to a contract. The burdens and benefits of the contract remain as agreed. If it is more economical to walk away from a contract than to perform, then “efficient breach” may be advisable – but there is no defense to performance absent a specific contract provision.
A contract provision that deals with unforeseeable contingencies caused by “acts of God” is known as a force majeure clause. This contractual provision can be used to allocate the risk if performance becomes impossible, or even just commercially impracticable, because of something that could not have been anticipated or controlled. Because “acts of God” or “impossibility of performance” or “commercially impracticable” can be exceptions that swallow the rule of enforceability, force majeure clauses are narrowly construed. When there is a dispute as to whether the force majeure clause applies, predictability is limited to those events the parties have specified in the contract:
“…[A] force majeure clause should be interpreted consistently with its function as a force majeure clause. The purpose of a force majeure clause is to limit damages in a case where the reasonable expectation of the parties and the performance of the contract have been frustrated by circumstances beyond the control of the parties.”)(citations omitted).
The conundrum, of course, is trying to identify the kinds of things that may make performance impractical in order to make contract enforcement predictable based on an “act of God.”
For example, a force majeure clause that says, “the contract is unenforceable in the event of a declaration of an emergency by a competent authority in the jurisdiction, or flooding, earthquake, or riot, at the place and time of performance that makes performance impossible, or unexpected changes in the law not caused by either party that prohibit performance,” is likely enforceable in a predictable manner. In contrast, a contract that says performance is excused if made, “impossible by an unexpected act of nature or a governing authority,” will be strictly construed and have limited application. So if there is civil unrest (e.g. violence resulting from a strike), the first clause would excuse performance as “riot,” while the second would not since the problem is not an act of nature or of a governing authority (i.e., it is caused by the strikers and their allies not the police).
In the sale of goods, the UCC obviates the need for specificity in Section 2-615, titled “Excuse by Failure of Presupposed Conditions.” Section 2-615 provides that when an event occurs that neither party expected nor controlled, rendering it impossible or making it commercially impractical to perform the contract, then the defaulting party has a defense to enforcement of the contract. The UCC, however, does require parties to make provisions and adjust performance insofar as commercially practical to minimize the burden of the intervening event on the parties.
“Impossibility of performance” and “frustration of commercial purpose” are broader than force majeure. A strike might fall under either of these categories, but a strike is not typically considered an “act of God.” Similarly, recommendations of “social distancing” measures to slow or stop pandemics might not make performance impossible, but it might raise costs so much that the commercial reality makes performance impractical.
Examples of government actions that might make contracts impossible or impractical to perform and beyond the control of the parties might deal with currency or trade. For example, in United Equities Co. v. First City National Bank, currency controls were unexpectedly imposed that prohibited the transaction required by the contract and would have made performance impossible, but shortly before the deadline for performance, futures options became available that would have been a reasonable substitute for strict compliance. In that situation, the contract was held to be enforceable, although the result would have been different absent the last minute availability of an alternative. This case also shows that both parties must mitigate the loss to reduce the burden of non-enforcement on both parties. Nonetheless, a court would likely hold that currency restrictions, or any act of government, is not an “act of God,” but a broader force majeure clause that included an act of government would be a defense to performance.
How might these principles apply to unexpected changes in export technology controls? Or if the designated currency for payment is withdrawn and new currency introduced on no or short notice? Or if funds are frozen in a banking crisis? The bottom line is that, in a crisis, think of unforeseen “acts of God” as the test; however, best practices counsel that specific circumstances or an objective test be spelled out in a contract to make the outcome predictable – even if the times are not.
The opinions expressed are those of the authors on the date noted above and do not necessarily reflect the views of Fish & Richardson P.C., any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes only and is not intended to be and should not be taken as legal advice. No attorney-client relationship is formed.
Danielle (DJ) Healey has been litigating complex cases in federal, state courts, and agencies, and handling licensing, antitrust, mediation and arbitration matters for over 34 years. She has focused on patent litigation and related antitrust and tort claims since 1994.