April, 7, 2020
Introduction to Force Majeure, and the Doctrines of Impracticability and Frustration of Purposes
The COVID-19 pandemic has rendered many contractual obligations difficult, or impossible, to perform. While some businesses have utilized telework technology to continue operations relatively uninterrupted, that is not an option for the sectors of our economy that provide in-person services, such as restaurants, hotels, and others in the hospitality industry. Many businesses will face weeks, if not months, without sufficient revenue or staff to satisfy existing contractual obligations. This will cause a ripple effect of contract defaults affecting vendors, landlords, lenders, and everyone in between.
How should parties address these inevitable defaults? Can the defaulting party use the emergent nature of present circumstances to avoid liability? These questions are particularly difficult to answer where one of the parties has already incurred costs and/or partially performed. To prepare for this situation, parties should review their contracts for force majeure provisions (discussed below), and also become familiar with the legal doctrines of “impracticability” and “frustration of purposes,” to determine whether they might permit either party to avoid liability under the contract.
Force Majeure – Review your contract to see if it includes a “force majeure,” a clause that excuses a party’s failure to perform when an unforeseen event outside that party’s control makes performance impossible. Not all force majeure provisions are identical, so analyze the provision closely to determine whether it actually works in your favor. A few specific things to consider when evaluating a force majeure provision:
- Who does it benefit? Some force majeure provisions apply equally to all parties to the contract, but some specifically only apply to one party. A robust force majeure provision will be no help to you if it only excuses the other party from performing.
- When is it triggered? Force majeure provisions typically list the types of events that trigger the clause – i.e., war, weather events, etc. Does your provision include “pandemic,” “state of emergency,” “quarantine,” or something similar as a triggering event? If not, does your provision include “catch-all” language that could include the COVID-19 pandemic, such as “acts of God” or “including but not limited to”?
- Does the triggering event make performance impossible? The party invoking a force majeure clause to excuse its failure to perform must generally show that the triggering event actually made performance impossible. If the triggering event merely made performance more costly, for example, the force majeure provision likely will not excuse performance. However, some force majeure provisions use a lower standard than impossibility, for example by excusing performance if it has become commercially unreasonable.
- Was the triggering event foreseeable or contemplated by the parties? Force majeure clauses generally only excuse performance if the parties did not know the triggering event had occurred or would occur.
- Is the force majeure clause exclusive? As described below, there are common law doctrines that may excuse performance under certain conditions. However, those common law doctrines are probably unavailable if your contract includes a force majeure provision, which presumptively excludes non-contract common law doctrines. However, read the contract carefully to determine whether the force majeure provision is meant to be read in conjunction with, and not exclusive of, other legal doctrines.
If your contract does not include a force majeure provision, then you should consider whether performance may be discharged under the legal doctrines of ‘impracticability” or “frustration of purposes,” which were embraced by the Arizona Court of Appeals in a case called 7200 Scottsdale Rd. Gen. Partners v. Kuhn Farm Mach., Inc.[i]
Doctrine of Impracticability
The doctrine of impracticability, also sometimes called the doctrine of impossibility, is defined as follows:
Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.
Traditionally, the doctrine applies to three categories of supervening events: (1) death or incapacity of a person necessary for performance, (2) destruction of a specific thing necessary for performance, and (3) prohibition or prevention by law. The third supervening event appears to be the most relevant to the COVID-19 pandemic, which has resulted in a number of regulatory actions and executive orders prohibiting a variety of business activities.
Doctrine of Frustration of Purposes
The doctrine of frustration of purposes differs from the doctrine of impracticability because it applies when circumstances have intervened to essentially destroy the expected value of the contract, even when performance is technically still possible. The doctrine is generally defined as follows:
Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.
In Arizona, there are four factors that must exist before the doctrine applies:
- The purpose that is frustrated must have been a principal purpose of that party;
- The frustration must be substantial, i.e., so severe that it is not to be regarded as within the risks assumed under the contract;
- The non-occurrence of the frustrating event must have been a basic assumption of the parties when they formed the contract;
- The contract does not place the risk of the frustrating event on the party seeking relief.
In conclusion, the
applicability of these doctrines and/or any force
majeure provision is going to be very fact specific, and will require a
careful analysis of the contract language, the purpose of the contract, the
obligations and intended benefits of the parties, and how the COVID-19 pandemic
has impacted all of these elements. If you find yourself dealing with a breach
of contract related to COVID-19, contact your attorney.
[i] 184 Ariz. 341, 347, 909 P.2d 408, 414 (Ct. App. 1995)
About the Author: Michael Rolland is a member of the civil litigation and commercial transactions practice groups with the law firm of Engelman Berger, P.C. Michael has a special interest in the intersection of technology and the law, and writes on tech law issues. [email protected] | 602.222.4977
Disclaimer: This article is not legal advice and is only for general, non-specific informational purposes. It is not intended to cover all the issues related to the topic discussed. If you have a legal matter, the specific facts that apply to you may require legal knowledge not addressed by this article. If you need legal advice, consult with a lawyer.