A Force Majeure Clause is not the Only Defense when COVID-19 Interferes with Performance

The impact of the novel coronavirus disease 2019 (COVID-19) has been felt across all industries.  Government-ordered shutdowns of non-essential work closed many businesses.  Those that continue (and perhaps even grow) nonetheless suffer from COVID-19 related disruptions.  As a result, many companies and individuals are struggling or unable to fulfill their contractual obligations.

Lawyers have written extensively about the force majeure provisions in some contracts that explicitly excuse performance when extraordinary events within their scope preclude performance.[1]  Depending on the specific language, a force-majeure clause may permit a party to suspend or terminate performance.  Even absent a force majeure clause, however, under Washington law a contracting party may still be able to invoke defenses to claims of breach in the context of the current pandemic.

To begin with, a delay in performance may not necessarily be a material breach of contract.  So, while a delay may constitute a breach (and create liability for any resulting damages caused), depending on the circumstances, it may not trigger default (i.e. the right of the non-breaching party to terminate the contract or to suspend its performance).[2]  Parties should review their contracts to see, for example, if they contain a “time is of the essence” clause.  While such clauses are not dispositive, they are an important factor in determining whether a delay by one party is a material breach that entitles the other party to terminate the contract.

Even if unable to satisfy their obligations completely, a party may find ways to perform partially or substantially.  Where partial performance benefits the non-breaching party and the breach itself was not willful, then the breaching party may be entitled to recover the value of its partial performance against the non-breaching party’s claim.  If a party substantially performs, the breach may not even be material, though the failure may still give rise to a claim for some amount of damages.[3]

Washington also recognizes several common law defenses that could have application and, if successful, could excuse performance.  First, performance may be excused where the performance would violate public policy.  Thus, it could be argued that, where performance would violate a stay-at-home order, performance ought to be excused due to public policy.  Second, performance may also be excused where it has become impossible or, in the modern iteration of the doctrine, “impracticable.”[4]  However, parties asserting this excuse carry a heavy burden and must show that performance would be extremely difficult, expensive, and injurious.  Furthermore, the events that caused the impracticability must be unexpected and unforeseeable.

Finally, performance also may be excused where, after a contract is made, an unforeseen change in circumstances makes one party’s performance worthless to the other, thus “frustrating” the purpose in making the contract.[5]  Unlike the impracticability defense, there is no impediment to performance required for a frustration-of-purpose defense.  The defense requires a showing that the parties assumed that the purpose would not be frustrated, the party’s purpose was frustrated through no fault of its own, the frustrated purpose was a principal purpose in making the contract, and the frustration was substantial—i.e. it’s not enough that the contract has simply become less profitable.[6]

–Sarah Gohmann Bigelow

[1] E.g., https://iclg.com/briefing/11618-is-it-possible-to-invoke-the-covid-19-pandemic-as-a-force-majeure-event-with-regard-to-a-commercial-contract.

[2] See, e.g., Vacova Co. v. Farrell, 62 Wn. App. 386, 403 (1991); Bailie Commc’ns, Ltd. v. Trend Bus. Sys., 53 Wn. App. 77, 82 (1988); see also Restatement (Second) of Contracts § 242 (1981).

[3] DC Farms, LLC v. Conagra Foods Lamb Weston, Inc., 179 Wn. App. 205, 220 (2014).

[4] Pub. Util. Dist. No. 1 of Lewis Cty. v. Washington Pub. Power Supply Sys., 104 Wn.2d 353, 364 (1985), modified, 713 P.2d 1109 (Wash. 1986) (citing Restatement (Second) of Contracts §§ 261 and 263 (1981)).

[5] Washington State Hop Producers, Inc., Liquidation Tr. v. Goschie Farms, Inc., 112 Wn.2d 694, 700 (1989) (quoting Restatement (Second) of Contracts § 265 (1979)).

[6] See Felt v. McCarthy, 130 Wn.2d 203, 207 (1996) (citing Restatement (Second) of Contracts § 265 (1979)).

 

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