The impact of Covid-19 on the performance of contractual obligations

Posted January 20, 2021 by taylor21

A sudden pandemic like Covid-19 is a supervening event that can excuse a person’s performance on an already executed contract when performance is no longer possible, practical, or purposeful.

When performance is no longer possible: The doctrine of impossibility applies where a person cannot complete performance of a contract because an unforeseeable supervening event destroys the subject matter of the contract through no fault of the person who seeks release from the contract’s obligation to perform. Brenner v. School House, Ltd., 302 N.C. 207, 210, 274 S.E.2d 206, 209 (1981). See also Steamboat Co. v. Transportation Co., 166 N.C. 582, 82 S.E. 956 (1914) (applying doctrine to contract between ship owner and party leasing it for ferrying purposes when ship was destroyed by fire through no fault of parties); Barnes v. Ford Motor Co., 95 N.C. App. 367, 382 S.E.2d 842 (1989) (affirming trial court's instruction on doctrine of impossibility where subject matter of lease, a tractor, was destroyed). It’s possible that efforts to mitigate the spread of the coronavirus will destroy the subject matter of a contract such that the doctrine of impossibility might apply to a party who seeks release from performance.
When performance is no longer practical: The fallout from the spread of the coronavirus might also require a person to invoke the doctrine of impracticability as an excuse for nonperformance. Impracticability is a condition in which a task or duty could possibly be performed but only with extraordinary and unreasonable effort. When a duty under a contract to perform is accepted with a particular expectation for the difficulty and cost of performance, and then unforeseen circumstances increase the difficulty or cost to the point of impracticability, then even though the performance is still possible, the doctrine of impracticability will allow a party with the duty to perform to avoid it, subject to other circumstances or the language of the contract to the contrary. See N.C. Gen. Stat. § 25-2-615. In cooperation with public health officials, state and local governments have already put regulations in place that might make performance impractical. The ongoing spread portends the installation of more regulations before it ends. In such a case, this defense is only viable where the person who seeks release from an obligation does not assume the risk of regulation in the contract. Alamance County Bd. of Educ. v. Bobby Murray Chevrolet, Inc., 121 N.C. App. 222, 465 S.E.2d 306 (1996) (holding that where, defendant, by terms of the parties' agreement, accepted responsibility for keeping abreast of governmental regulations bearing upon the contract, the defense of impracticability will not excuse performance).
When performance is no longer purposeful: Lastly, an unforeseeable supervening event might frustrate the purpose of a contract such that it excuses performance. Frustration of purpose is similar but distinct from the doctrine of impossibility. “It more properly relates to the consideration for performance. Under it, performance remains possible, but is excused whenever a fortuitous event supervenes to cause a failure of the consideration or a practically total destruction of the expected value of the performance. The doctrine of commercial frustration is based upon the fundamental premise of giving relief in a situation where the parties could not reasonably have protected themselves by the terms of the contract against contingencies which later arose." Brenner, 302 N.C. at 211, 274 S.E.2d at 209 (quoting 17 Am. Jur. 2d Contracts § 401). Due to the uncharted waters in which many now tread, the doctrine of frustration of purpose will be an avenue for relief from otherwise enforceable obligations.
Start with the contract: Most commercial contracts contain a force majeure clause in which the parties allocate the risk of supervening events outside of their control, such as inclement weather, war, terrorism, government acts, and labor strikes, rendering performance either impossible, impracticable, or without intended purpose. The majority of force majeure clauses contemplate events and circumstances that would justify a court to excuse performance anyway, but it’s nevertheless a good place to start when reviewing options if performance becomes unreasonably burdensome, impractical, or impossible due to the spread of the novel coronavirus.
Remedies, Demands, and Negotiations: In order to mitigate the economic impact of the spread of the novel coronavirus, it will be necessary for parties at contractual arms-length to work together. Parties can amend the obligations owed under a contract, enter accord and satisfaction agreements, or terminate contracts through settlement. If that does not work, then individuals and businesses can avail their cause to the courts. However, the ability to exercise rational judgment and negotiate terms in light of the difficulty many now face is critical for local businesses and communities to sustain economic viability during the pandemic and once it ends.
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Issued By Taylor Hastings
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Business Address 1340 Environ Way, Chapel Hill, NC, 27517
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Categories Legal
Tags attorney , business , contracts , law , lawyer , legal
Last Updated January 20, 2021