COVID-19 has shone a bright spotlight on situations where a party may need to get out of a contract due to unforeseen circumstances. As many businesses have been required to close or reduce their operations, many obligations have been left uncompleted. Where does this leave your organization?
Although the Force Majeure clause has become an often-referenced provision, there is a spectrum of approaches to dealing with a contract during a global disruption like the coronavirus. A party may also use the doctrines of Impracticability or Frustration of Purpose to excuse performance.
Doctrine of Impracticability
- Impracticability applies when contract performance has become excessively burdensome by an unforeseen supervening event that was not caused by either party. The party that wishes to get out of the contract will need to show that it is unreasonably difficult to complete the contract. The traditional example of this is a theater that burns down. If the building is destroyed, the ticket sales cannot be honored because it would be impracticable for the show to go on. It is important to note that impracticability does not include a change in cost for either party. Courts generally see cost fluctuations as a risk of doing business and are not sufficient to excuse performance.
Frustration of Purpose
- Frustration of Purpose applies when a supervening event fundamentally changes the nature of a contract and makes one party’s performance worthless to the other. In this approach, the purpose of the contract has become essentially useless to the other party. An example of this could be an advertising campaign for a gala during COVID restrictions. Imagine that the governor has created a policy that restricts gatherings which leads to the cancellation of the event. Although the ad company could still run the campaign and the non-profit could still pay for it, the contract performance would be pointless since the event is canceled.
Force Majeure
- A Force Majeure clause may guide the contract during an event like COVID. A Force Majeure clause is a contract provision that excuses performance if a significant event, such as an Act of God, occurs that prevents the performance of one or both of the parties.
How should you draft force majeure clauses moving forward?
- Force Majeure clauses should be drafted as precisely as possible to ensure enforceability. Although many clauses include a statement like “Acts of God”, courts typically require the events to be clearly listed and to closely fit the catastrophe taking place.
- When you meet with your attorney to create a Force Majeure clause, consider both general types of catastrophes and regionally specific events. General types could include fire, terrorism, acts of war, flooding, and epidemics. Regionally specific events could include significant snowstorms, snow closures of interstates, earthquakes, tornados, hurricanes, or tsunamis.
Next Steps
- As with most areas of law, excusing contract performance is nuanced and is best evaluated by an experienced lawyer. The Colorado Nonprofit Legal Center is available to provide specific legal advice for your organization.