In our last installment, Ramon was able to use a Force Majeure clause as leverage to help renegotiate supply terms in response to the COVID-19 pandemic. As we discussed, Force Majeure clauses may not be as broad and comprehensive as some may think because courts generally read this type of language narrowly. Not all contracts contain these clauses, but there are similar protections afforded by other legal bodies, the most notable of which is called the common law.
By way of background, common law is not created by statute or regulation but as the result of court decisions and opinions rendered by judges over the course of history. Over time, these decisions and opinions have given rise to legal rules that have acquired the force of law. In addition to statutes enacted by legislatures and regulations issued by agencies, each state of the United States has its own body of common law. While the common law between and among states can differ, efforts to conform state contract law has given rise to certain commonly known defenses to contract enforcement in response to unanticipated circumstances. Among the most widely known defenses to contract enforcement acknowledged by state common law are Impossibility of Contract, Impracticability of Contract, and Frustration of Purpose, all of which serve almost like common law versions of Force Majeure clauses.
Impossibility/Impracticability of Performance
U.S. courts are very reluctant to disregard contractual requirements, so the burden on a party to show impossibility or impracticability of performance will be high. As explained by the New York Court of Appeals, the highest judicial body in the State of New York: “Impossibility excuses a party’s performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.” As generally construed, objective impossibility demands that the situation is such that the performance would be impossible for any party confronted by the same circumstance. In addition to the performance being “impossible,” the circumstances conspiring to render the performance “impossible” cannot be foreseeable. Whether a circumstance of impossibility could have been anticipated can be a difficult issue to assess. One possible rule of thumb here is that if the event is generally known to have previously occurred, or might occur, then it is reasonably foreseeable.
The doctrines of Impossibility and Impracticability are often viewed as being interchangeable, but the term “impracticability” actually speaks to a modern modification of the defense of Impossibility. According to The Restatement (2d) of Contracts, a commentary on general principles of U.S. contract law, a performance is rendered “impracticable” if it can be accomplished “only with extreme and unreasonable difficulty.” This concept informed the drafting of Section 2-615 of the Uniform Commercial Code, a Code prescribing rules for sales of goods transactions, which has been adopted, with variation, by each of the 50 U.S. states. Model UCC Code Section 2-615 provides that “delay in delivery or non-delivery in whole or in part by a seller” is not a breach “if performance as agreed has been made impracticable by the occurrence of a contingency, the non-occurrence of which was a basic assumption on which the contract was made . . .” In contrast to the doctrine of impossibility, which the New York Court of Appeals considered to be governed by an objective standard, i.e., whether a circumstance would render a contract impossible to perform under any circumstance, to assess Impracticability requires one to consider the basic assumptions underlying the parties’ contract.
While Section 2-615 does not expressly require that the parties have not been able to foresee the occurrence of a disruptive event, it is generally understood that the basic assumptions underlying the parties’ agreement, even if not actually written into the agreement, implicitly cover a range of scenarios that a third party could objectively find reasonably foreseeable under the circumstances. Put another way: if it would have been unreasonable for the parties not to make certain assumptions about their contractual relationship, then the unexpected occurrence of an event that should have been anticipated, but was not, will not support application of the doctrine of Impracticability. As such, whether supply chain disruptions caused by the COVID-19 pandemic should be allowed to discharge a party’s obligations under its contract, may well turn on when the agreement was entered into. While, arguably, the potential risks posed by COVID-19 would not have been apparent to negotiating parties in September 2019, by January 2020, the situation had changed dramatically, and parties were on notice of the existence of the virus and the risk it potentially posed to international commerce. As such, had Ramon’s agreement with ABC Meat Corporation not contained a Force Majeure clause, he may still have been able to argue that his obligations were dischargeable under the doctrine of impracticability, since the advent of the pandemic and the restrictions accompanying it, were, arguably, events that would have been unreasonable for the parties to have anticipated at the time they entered into their agreement.
Frustration of Purpose
A doctrine related to the doctrines of Impossibility/Impracticability is Frustration of Purpose. The idea here is that if, after parties have entered into a contract, its purpose is substantially frustrated, and the event, giving rise to this frustration of purpose, was not the fault of the performing party, the performance should be discharged. It has been pointed out that the doctrine may be invoked even if performance is possible but due to an unexpected change of circumstances, a basic underlying reason for the performance has been frustrated. An example would be a vendor who has undertaken the obligation to supply T-Shirts to an event planning company that were intended to be distributed at an outdoor company retreat, which ended up being cancelled as the result of the COVID-19 pandemic. Insofar as the underlying event supplied the reason why the parties entered into their agreement to begin with, its cancellation frustrated the major purpose behind contractual relations.
The takeaway is this: Where an agreement does not contain a Force Majeure provision, parties may need to consider other defenses to performance, like Impossibility/Impracticability of Performance and Frustration of Purpose. Whether these doctrines have application may turn on when and where the contracts were entered into and whether, at that time, the disrupting event could have reasonably been foreseen and addressed as part of the parties’ agreement. So, you have options!