IMPOSSIBILITY OF CONTRACTUAL PERFORMANCE IN THE AGE OF COVID-19
In our last blog article, we talked about the role of a force majeure provision in determining your business’s rights under its existing contracts. But what happens if there is not such a provision? If a business cannot perform under the agreement due to COVID-19, is there some other possible avenue for relief? The contractual doctrine of impossibility of performance can be used as a defense to performance failures that would otherwise constitute a breach of a contract. The ability to successfully invoke this defense and its consequences are less clear than what might be available under a force majeure provision. But that does not mean that there should not be a close analysis of the option if a business is unable to strictly perform.
Under general contract law, impossibility of performance is usually held to mean that there is no possible way for a party to perform its duties. The mere fact that it has become more difficult to perform or more expensive to perform does not, under general contract law, give rise to impossibility of performance. So, the fact that COVID-19 restrictions make it more difficult to perform or more expensive to perform may not provide a defense. However, if following the mandates of public health orders make it impossible for the contract to be performed, there may be a basis for relief.
The law generally recognizes at least three types of impossibility. The first is where one of the parties is impaired or dies, such that they cannot perform. A contract with a sole proprietor who comes down with COVID-19 might find some relief here. A second type is where an item necessary for performance has been destroyed, or perhaps does not come into existence at all. Generally, these cases deal with the physical destruction of an object, such as a fire that destroys a social hall that can no longer be leased for an event. The third type is where a new law comes into force after the signing of a contract that makes a particular action illegal. Executive orders that result in a contract being impossible to perform may fall into this category.
The Uniform Commercial Code gives some further room for relief in the context of a commercial transaction. It allows the defense of commercial impracticability of performance for contracts that involve the sale of commercial goods between merchants. In this context, a merchant is someone who regularly trades in goods or in markets of the type involved in the contract. This defense may arise if an unforeseen event occurred that would make performance unreasonably difficult or expensive. Generally, it must be an event that could not have reasonably been foreseen by the parties at the time the contract was made. It would seem there would be a strong argument that COVID-19 would constitute such an unforeseen circumstance. But, again, this additional defense only arises in the case of the sale of commercial goods.
As a final note, if the contract contains a force majeure provision, then the law generally assumes that the parties have properly allocated risk and the defense of impossibility of performance, or commercial impracticability, will not be available and the parties will have to rely on the force majeure provision.
If your business agreement does not contain a force majeure provision and impossibility of performance or commercial impracticability do not provide the relief that you are seeking, there is one other possibility you may wish to consider. And that will be subject of the third article in this series.