The government’s COVID-19 shelter-in-place orders have placed unusual strains on contractual relationships. Employment, construction, landlord-tenant, and other contracts have been impacted, affecting most of our nation’s population. While unusual, such widespread, wholesale, strains on contractual relationships are not unprecedented. The law has dealt with these types of strains before, such as during times of war or natural disasters. This article provides an overview of certain rules that may apply to contracts to be performed during the Coronavirus crisis.
Contracts usually involve promises to exchange goods or services for money. At contract formation, each party consents to a legal duty to perform the promise made. A party’s failure to perform as promised is a breach of contract. The party who breaches the contract becomes responsible to pay the other party’s damages unless the party in breach can rescind the contract (a “rescission”) or can excuse the duty to perform (an “excuse”).
Force Majeure means “Superior Force.” It refers to an unexpected event (such as war, crime, or force of nature) that prevents a party from performing a contractual promise. Some contracts contain an explicit Force Majeure clause. When a Force Majeure clause exists, it will determine the rights of the parties (assuming it is specific to the circumstances). When a Force Majeure clause does not exist (or does not address the circumstances), then unexpected events (such as the COVID-19 crisis) may give rise to claims of rescission or excuse.
Rescission and Excuse:
The difference between rescission and excuse is, in part, one of timing.
Rescission focuses on contract formation. If a party’s consent at formation was not freely given, then that party can rescind – in effect, erase – the contract. Prompt notice of a decision to rescind must be given. Upon rescission, both parties will be freed from their contractual obligations. To avoid unjust enrichment, however, both parties must return things of value received from the other party while the contract was in effect.
Excuse focuses on the contract performance. If a contracting party has an excuse for not providing performance when due (i.e., a legally sufficient reason for avoiding performance), then the party’s non-performance does not create an actionable breach of contract. Depending upon the circumstances, an excuse may be temporary (suspending the obligation) or permanent (erasing the obligation).
Mutual Mistake, Frustration of Purpose, and Impracticability:
The government’s COVID-19 shelter-in-place orders may (or may not) justify a rescission or an excuse based upon the defenses of mutual mistake, frustration of purpose, impracticability, or impossibility.
Mutual Mistake of Fact:
A mutual mistake of fact occurs when both contracting parties make a mistake about the same material fact(s) going to the central purpose of their contract.
Frustration of Purpose:
Frustration of Purpose is an event of an unforeseen nature that completely undermines a contracting party’s main purpose for having entered the contract.
Impracticability and Impossibility:
Impracticality is an event which makes performance technically possible but objectively impracticable due to excessive and unreasonable difficulty. Impossibility is an event which makes performance objectively impossible.
Whether a COVID-19 stay-in-place order justifies any of those defenses will depend on the circumstances. As with most legal issues, the parties may have different positions about their rights. In such situations, the parties should make good faith efforts to reach a reasonable settlement.
On February 1 st “C” ordered a $1,000 machine, to be delivered by May 1 st , and gave a $300 deposit. C and M agreed time was “of the essence” under their contract. On March 3rd , the government issued a COVID stay-in-place order. As a direct result of that order, M became unable to deliver the machine by May 1 st . C then ordered the same machine from “X.” C paid X $2,500 to have the machine delivered by May 1 st . C demands that M pay C $1,800, based on C’s $300 deposit and the $1,500 difference between C’s contract price with M and the amount C paid X.
Even though C and M both acted reasonably under the circumstances, C is out-of-pocket $1,800 and M holds $300 from C. In the absence of the COVID order, C would have a solid breach of contract damage claim against M for $1,800. The COVID order may make a difference (or may make no difference). M can defend on the basis that the COVID order prevented M’s performance giving rise to the right to rescind the contract, or to an excuse for the alleged breach, based upon mutual mistake of fact, frustration of purpose, impracticability and/or impossibility. M might even assert C breached the contract (by not buying from M) on the argument that C should have given M more time to perform. If this dispute is tried by a court, the results could vary, depending upon the evidence. C has the better case, however. Under the circumstances, both parties should be flexible and should attempt to resolve their dispute. At a minimum, M should return $300 to C, and M should be willing to pay C some money, or make some other accommodation, to offset C’s $1,500 loss.
Whether your matter involves contracts and Covid-19 or another legal issue, in these uncertain times a consultation with a qualified attorney will help you assess your options and best route for resolution. Shea & McIntyre’s attorneys are highly experienced in contracts and in litigation and are available for consultation to service your concerns and specific needs. Our firm serves San Jose and surrounding areas.
Please note that every situation is unique, and this article is not legal advice for your circumstances. The reading of this article does not create an attorney-client relationship and should not be taken as legal advice regarding your situation.