The Impact of Coronavirus on Contracts and How to Get a Quick Solution

By: Bridget Maher

The unprecedented coronavirus pandemic has caused many undeniable changes and difficulties that affect businesses.  These effects include shutting down, laying off employees, and closing permanently.  One significant impact on businesses is the impact coronavirus has had on contracts.  Coronavirus had caused nonperformance of contracts and the need to renegotiate contracts.  The degree of impact is unknown since many court cases that involve the impact of the coronavirus on contracts have not concluded.  But lawyers are arguing a variety of defenses including: 1.) force majeure, 2.) impossibility and impracticability, and 3.) frustration of purpose.

One argument is to enforce force majeure clauses in contracts that were disrupted by the pandemic.  Force majeure clauses are a term in many standard contracts that allows a party to terminate a contract when an unforeseeable event arises that makes contractual duties impossible to complete.    These clauses have been applied when “natural disasters such as floods, tornadoes, earthquakes and hurricanes, or man-made disruptions such as acts of terrorism, riots, strikes, and wars” have impacted a party’s ability to fulfill a contract.  At this point, it is not apparent whether courts will declare the coronavirus as an unforeseeable event that creates an impossibility for a party to fulfill their contractual duties.  These cases are still before the Court awaiting final decisions.  The current arguments before the courts regarding the coronavirus is that a global pandemic is an unforeseeable event and problems such as travel restrictions and mandatory business closures could make contractual obligations nearly impossible to fulfill. 

If a force majeure clause is not in a contract, the parties can still raise an impossibility or impracticability argumentImpossibility and impracticability defenses can be argued when a contractual obligation becomes impossible or nearly impossible to perform through no fault of the defaulting party.  But generally, these defenses are narrowly appliedIt is not clear if the coronavirus may induce enough impracticability for courts to excuse contractual obligations.  Many non-essential businesses were forced to close and thus forced to shut down all business operations through no fault of their own.  This scenario seems as if it would allow for the impossibility or impracticability defense.

Contracted parties are also using a frustration of purpose doctrine to terminate their contractual obligations of a contract during the coronavirus pandemic.   The frustration of purpose “takes place when unexpected circumstances undermine the purpose of the contract,” thus making the performance of the contract worthless to one of the contracting parties.   Many current arguments, such as in the cases described below, argue how the coronavirus frustrates a contracting party’s purpose of entering the contract and thus the contracting party should be freed from his/her contractual obligations by voiding the contract.  For example, “there is sure to be a deluge of dishonored contracts for halls, event spaces, food catering and the like that are simply not going forward due to restrictions on gatherings.”  These parties will argue that since they cannot hold their gatherings because of restrictions on occupancy the contract is worthless.

Many cases involving the pandemic and its effects on contracts are currently being triedIn re Condado Plaza Acquisition LLC involved a contract to buy a hotel in Puerto Rico.  The buyer did not close by the agreed upon date in 2020, so the seller declared that the buyer was in default.  The buyer argued under the doctrines of frustration of purpose, impossibility, and impracticability that he should be granted an extension to buy the hotel.  Under frustration of purpose, the buyer argued that the purpose of the contract was to buy an operating hotel, and this was frustrated since he would not be able to currently operate the hotel because it was required to close due to the pandemic.  The court did not accept this argument because of specific clauses in the contract related to the seller having no obligation to “maintain operations at the hotel.”  Next, the buyer argued that the coronavirus made buying the hotel impossible or at least impracticable.   The court also denied this argument because the buyer reaffirmed the agreement after the pandemic was well-known.  Furthermore, the court said that all three of the doctrines could only be used to excuse performance, not to extend payment deadlines.  Thus, the court held that none of the doctrines would extend or excuse the buyer’s failure to fulfill their contractual obligations.

The next case, Rosado v. Barry University, also asserts the previously discussed doctrines and is currently being decided.  A student is arguing that the university violated its contractual obligations to her when the school switched to online instead of in-person learning.  The school is arguing that providing in-person classes during a pandemic was impossible and that the pandemic “frustrated the purpose of the contractual provisions regarding in-person classes.”  The school argued that the student’s claims should be dismissed on account of the impossibility and frustration of purpose doctrines, but the court held that the case will not be dismissed at the pleading stage.  The court decided not to dismiss the case because there was an open question of which party should bear the risk of the pandemic because the contractual language was unclear.  However, the court was clear in that the coronavirus “does not conclusively establish the defense of impossibility or frustration of purpose.”  This is just one example of many pending court cases that involve students suing their universities for switching from in-person to online learning.

Courts are treading carefully when it comes to coronavirus contract cases because it is not entirely clear how these old doctrines should be applied.  Courts want to uphold contractual obligations so that contracts are meaningful, but also must consider that things happen and sometimes it is unjust to uphold contracts.  It is clear though that force majeure, impossibility, impracticability, and frustration of purpose arguments are currently being made involving contracts affected by the pandemic, but is unclear how courts will respond to these arguments.  We do know that all these doctrines require a very fact specific analysis thus it is likely that court decisions will change case-by-case and there will not be one decision regarding all contracts impacted by coronavirus. 

Businesses will have to just wait and see if a court will find their contract void since the common defenses are fact specific and thus every case will be decided differently.  But there is another option.  Instead of waiting for a court date to figure out if a court will void your contract, which could take quite some time since the courts are currently very backed-up, businesses may find a quicker resolution to these open-ended questions by using arbitration or another form of alternate dispute resolution.  Arbitration is highly recommended with coronavirus contract disputes because it is an efficient solution and provides more scheduling flexibility.  Mediation is another alternate dispute resolution type that is recommended in coronavirus times.  In short, coronavirus affected contracts are an issue that the courts will face for a long time.  And, how courts will treat contracts impacted by coronavirus is not clear, but there are alternate dispute resolution options to try to conclude this dispute more quickly and often presents a solution that satisfies all parties.