Excusing Contract Performance During COVID-19

Business closures in Pennsylvania following the COVID-19 pandemic will likely affect the performance of contracts to which you are a party. In a series of executive orders, Governor Wolf declared a disaster emergency in Pennsylvania and issued advisory, then mandatory, closures of businesses and other organizations. Other states and foreign nations have ordered various closures and travel bans. It is important for you to review all your open contracts to consider whether you or the other party, or both, will be unable to perform due to these declarations, and whether performance may be excused.Such contracts include personal services, materials supply, hotel and construction contracts. Whether either or both parties may be excused from performance depends on the language of the contract and, practically, the further agreement of the parties as to what that language means.

The relevant contractual provision may be called “force majeure” or “cancellation.” Force majeure means an irresistible force preventing the performance by one or more parties despite reasonable care. Examples of these forces include earthquake, flood and other “Acts of God,” labor shortages and materials unavailability. Government decrees of business closure may constitute force majeure. Whether the provision is effective to excuse performance depends on the precise language of the contract and the facts at the time of the determination.

One form of contract provides for group hotel services to an organization hosting a conference. The force majeure clause allows only the hotel to be excused from performance when caused by “matters beyond the reasonable control of the Hotel, including but not limited to acts of God….civil actions or other similar matters that make it impossible for the Hotel to substantially perform the obligations of the Agreement….” Governor Wolf’s later orders in response to COVID-19 would make performance impossible by the hotel but initial government statements would not provide the facts needed to trigger the force majeure clause.

Those declarations became more restrictive during the month of March. Initially, southeastern counties were subject to caution, not justifying cancellation of the contract. On March 6, 2020, Governor Tom Wolf declared a disaster emergency throughout the Commonwealth of Pennsylvania. Next, he declared the Commonwealth to be a mitigation area, strongly urging all non-essential businesses to close. He ordered that all restaurants and bars close their dine-in facilities, allowing that essential service organizations may remain open but should observe social distancing. On March 19, 2020, Governor Wolf prohibited operation of businesses and organizations that are not life-sustaining and issued a chart of those which may remain open or must be closed to the public. That list can be found at https://www.governor.pa.gov/wp-content/uploads/2020/03/20200319-Life-Sustaining-Business.pdf.

A party seeking to invoke a force majeure clause for cancellation should wait until the circumstances support the terms of the particular clause. Failure to have facts justifying non-performance can result in a repudiation of the contract, exposing the declaring party to liability for damages to the non-declaring party.  Some contracts contain stipulated money damages for cancellation which apply when force majeure may not be clearly invoked or mutually agreed. The declaring party should consider the magnitude of such damages before invoking force majeure without strong facts or agreement of the parties to support it.

Other contracts have broader force majeure terms. Another example has a balanced force majeure clause excusing performance by either party. Performance can be excused upon the occurrence of certain named events and “other similar matters” that “make it impossible, illegal, commercially impracticable or inadvisable” to perform. The clause provides for notice to the other person, refunds of monies paid against reasonable expenses incurred and refers to excuse of either complete or partial performance.

Other contracts do not contain force majeure provisions. Without that clause, another cancellation mechanism provided at common law is the “frustration of purpose doctrine.” The doctrine is implied by law and is likely not expressed in the contract. If the clear purpose of the contract cannot be achieved because a specific thing or condition needed for performance no longer exists, cancellation may result by agreement of the parties or by court order. The parties to a contract should express in the contract its purpose to preserve the argument that specific facts frustrate its purpose, supporting excuse of performance by one or more parties.

The devil is in the details. What does your contract say? What law applies to your contract? Are the facts ripe to support a force majeure claim or other claim excusing performance? Will the parties find mutual benefit to excuse performance, agreeing without litigation? Are there alternative positions such as postponement of performance or reforming the contract for performance at a later date by a new party? These questions must be considered, and the details clarified, to make a sound business decision on excusing performance under a contract. This article is not legal advice but a caution to seek legal counsel before taking action on a contract.

© Robert J. Hobaugh, Jr. 2020