Breach of Contract Defenses During COVID-19

When entering into a contract, parties often look to protect themselves should matters go awry. It is not a pleasant thought or exercise to go through, but it is one every practical person and business should make in order to ensure that the business will succeed, no matter how circumstances change.

Case in point, the COVID-19 pandemic was completely unforeseen by many businesses and has caused many contract terms to be unmet. Whatever your contract terms may be, every party to the contract has been affected. While some parties may be understanding and forgiving, many other parties will fight tooth and nail for what they believe they are owed.

So now that you have been affected by COVID-19, and you cannot fulfill your contract obligations, what can you do? The following contract clauses and defenses are some of the most common, and most effective ways to safeguard yourself against breach of contract claims, whether caused by coronavirus, or in preparing for the future: 1) Force Majeure clauses; 2) Excuse of Performance; and 3) Frustration of Purpose or Impossibility.

Force Majeure

One contract clause that may apply directly to the COVID-19 pandemic is a Force Majeure clause, which is typically triggered due to some unforeseen “act of God.”This clause applies when “[u]nder 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.” (Pacific Vegetable Oil Corp. v. CST, Ltd. (1946) 29 Cal.2d 228, 238.)

Typically, the Force Majeure clause is used when a natural disaster occurs, such as an earthquake, hurricane, or tornado. Depending on the language used in the Force Majeure clause in your contract, it may also apply to other unforeseen events, like labor strikes, war, or, as is the case here, a pandemic.

Effectively, a Force Majeure clause would allow both parties to exit the contract when the circumstances could not have been anticipated at all. However, whether the Force Majeure clause in your contract includes an event like the COVID-19 pandemic will be hotly contested. If the clause in your contract specifically mentions an outbreak or pandemic, then the clause will likely be given full effect.

If, however, the Force Majeure clause is silent on whether a pandemic applies, you will need to show that the pandemic’s effect “could not have been prevented by the exercise of prudence, diligence, and care.” California courts often construe this narrowly, so only citing loss of money may not be enough for a Force Majeure clause silent on pandemics to activate. Some greater effect preventing performance must be shown.

Furthermore, most Force Majeure clauses include notice requirements instructing the party affected to give notice to the other party. The contract terms must be reviewed and followed through carefully so that your business is protected. Simply having the Force Majeure clause may not be enough.

Finally, as it is a contract clause, the Force Majeure clause must be included in your contract for you to rely on it. If one is not included you will have to rely on other defenses.

Excuse of Performance

Even if your contract does not include a Force Majeure clause, under California Civil Code section 1511, you may still be given reprieve from performing on the contract. Civil Code section 1511 states, in relevant part:

The want of performance of an obligation, or of an offer of performance, in whole or in part, or any delay therein, is excused by the following causes, to the extent to which they operate:…

2. When it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary…

Here, the argument would be relatively straightforward: you have been prevented or delayed from performing on the contract because of an “irresistible, superhuman cause.” If your business is a non-essential business under the various government officials’ orders, being prevented or delayed by COVID-19 would squarely fall within this code section. However, where issues may arise is whether your inability to perform was actually prevented or delayed by COVID-19.

This is similar to the analysis in the Force Majeure clause. Simply not having the funds to fulfill a contract obligation may not be enough. Every case is different, so being able to document and explain just how and why COVID-19 has affected your ability to perform may be the key to having your performance excused.

Frustration of Purpose

Aside from a contract clause of the code section, common law also provides for a defense against breach of contract claims when there is a frustration of purpose, or impossibility. California courts have held that if “the doing of the thing contracted for is…impossible, neither party is bound to its performance.” (Eucalyptus G. Assn. v. Orange C. N. L. Co. (1917) 174 Cal. 330, 334.)

This is further supported by two code sections, California Civil Code section 3526 and 3531. They state that “no man is responsible for that which no man can control”that “the law never requires impossibilities,” respectively.

California courts later expounded on this doctrine by applying it only if 1) performance remains possible; 2) but the fundamental reason of both parties for entering into the contract has been frustrated by an unanticipated supervening circumstance; and 3) it destroys substantially the value of performance by the party standing on the contract. (Cutter Labs., Inc. v. Twining (1963) 221 Cal. App. 2d 302, 314–15.)

Like the other two defenses and clauses discussed, frustration of purpose seemingly applies to the COVID-19 pandemic. However, the Courts are hesitant to discharge all obligations owed pursuant to a contract. They narrowly construe whether a contract’s purpose has actually been frustrated, often times deciding that even if performance is impractical, it is not impossible.Therefore, the parties are still obligated to perform.

Strategies For You Moving Forward

While these provisions may ultimately be helpful in defending your business during the current pandemic, the Courts will likely look at any attempt to avoid performance with careful scrutiny. With that in mind, it would be best to start preparing and documenting how your business has been affected COVID-19.

Furthermore, reaching out to the other party in the contract and informally resolving any obligations to perform will always be a strong first step. After all, these doctrines are couched in equity, and the more you act reasonably and in good faith, the more likely the Court will grant the relief sought.

Whether it be reviewing and drafting contract terms to prepare your business for the future, or defending the business against potential breach of contract claims, Shenon Law Group is available to help make sure your business will continue to thrive.