~~UPDATED JUNE 9, 2020~~

As California moves forward with reopening, one might assume that the issues discussed in the blog post below may no longer be as relevant. However, that assumption is wrong: the public health crisis is not over, and the legal implications resulting from the pandemic will undoubtedly be felt for several years to come. It is critical for businesses to understand the law surrounding interruptions to their normal operations as a result of COVID-19 and to plan accordingly, and so we encourage you to read on to learn more about how the pandemic will impact contracts in the months and years ahead.

The coronavirus pandemic ripping through the world is creating havoc and loss on an unprecedented scale. As nations grapple with the loss of life, ordinary citizens are left to shelter in place, watching the grim statistics while comforting themselves in the knowledge that this, too, shall pass.

For many business owners, however, the outbreak of COVID-19 has created a challenge that feels insurmountable and never-ending. The desire to keep the business operating, pay employees, and service clients and customers—all while facing closed storefronts, recurring costs, and uncertain demand—will inevitably result in companies taking hard looks at their contractual relationships to see which agreements will remain in force, which will have to be renegotiated, and which may need to be breached.

We know that for almost every company out there, these will become the inevitable choices that must be made. The purpose of this article is to provide a succinct overview of how California law deals with excusing contractual obligations* and how those principles might be applied to the pandemic at hand.** The main takeaway for our readers is that contract law is a stubborn thing, and it has survived wars, economic depressions, and natural disasters. It will survive COVID-19, and it will do so through the application of contract law principles like force majeure, impossibility/impracticability, and frustration of purpose.

Contractual Relief: Force Majeure Provisions

The first consideration is whether the contract between the parties includes a force majeure clause. Force majeure (literally, “major force” in French) is a legal term of art to describe an unforeseeable act, event, or occurrence that is so beyond the control of the parties to a contract that it impedes or prohibits one or both parties from performance. Force majeure clauses can be applied to encompass any unforeseen event not contemplated by the parties, such as wars and civil unrest, as well as more typical “acts of God,” like natural disasters. They are often set apart as separate paragraphs or as a separate section of the agreement, but they can also be found in other parts of the contract, such as in the “performance,” “termination,” or “purpose” sections. However, there are a few important things to understand when it comes to force majeure clauses and their applicability to the COVID-19 pandemic.

First, force majeure clauses excuse performance under the contract—they do not nullify or otherwise cancel the agreement. In fact, they typically contain language requiring the excused performance to be performed once the supervening event has ended. They are also typically applied narrowly to look at whether the performative act itself has been rendered impossible or prohibitively impracticable by the supervening event. This point is critically important: if your only obligation to perform under a contract is to pay money for goods and/or services, and such goods and/or services are being provided, force majeure clauses likely will not excuse you from your obligation to pay, even if you no longer need the goods or service or are experiencing financial hardship as a result of the force majeure event. Likewise, performance in providing goods and/or services under an agreement will not be excused merely because it will be more expensive or more difficult for you to provide than originally anticipated.

Second, like everything else in a contract, force majeure clauses will be interpreted based on the language contained in the agreement. That means courts will look to see what acts, events, or occurrences are explicitly listed in the provision. If pandemics or disease outbreaks are listed, then the language will likely be applied as written. But, if an agreement contains a force majeure clause that explicitly lists other occurrences that would qualify—floods, earthquakes, etc.—and pandemics/disease outbreaks are not listed, a court will likely assume the parties agreed that only the occurrences listed qualify as force majeure events that will excuse performance. See California Civil Code Section 1511(2) (providing that performance may be excused “when it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.”) In such a situation, the COVID-19 outbreak will likely not excuse performance under the force majeure provision of the agreement, and may even prevent you from invoking the non-contractual defenses discussed below.

If no specific events are listed and the clause is broadly written, a court will have to determine if a pandemic such as COVID-19 is a foreseeable event that could not otherwise be overcome through reasonable, alternative means such that it would fall under the clause. On the one hand, what we are all experiencing with COVID-19 is unprecedented: a worldwide pandemic effectively shuttering economies on every continent, with all non-essential workers effectively quarantined to their homes. On the other, that does not necessarily make COVID-19 unforeseeable: MERS, SARS, Ebola, and other pandemics have regularly disrupted societies and trade all over the world for the past twenty years, and the flu wreaks havoc across this country on an annual basis. Where a court ultimately lands on this question will depend on the nature of the contracts, the parties involved, the types of businesses involved, and a host of other factors unique to the contractual relationship.

Non-Contractual Relief

Many contracts do not include force majeure clauses, and as discussed above, even those that do may use language that is unclear or too broad to narrowly apply. In such circumstances, California law has long recognized certain legal doctrines that will apply to excuse performance in the face of a force majeure event, including impossibility/impracticability and frustration of purpose.

1. Non-Contractual Application of Force Majeure

California Civil Code Section 1511 enshrines the equitable concepts underpinning force majeure by providing that performance may be excused “when such performance…is prevented or delayed by the operation of law,” or “when it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.” Arguably, the COVID-19-inspired laws mandating non-essential workers to shelter-in-place would qualify as “operations of law” that will make it impossible or impracticable for businesses to comply with their contractual obligations. Likewise, a worldwide pandemic seems to fit the description for an “irresistible, superhuman cause” of a party’s non-performance.

While this statute is in keeping with California’s traditionally broad reading of what qualifies as a force majeure event [see Pac. Vegetable Oil Corp. v. C.S.T., Ltd., 29 Cal.2d 228, 238 (Cal. 1946) (holding that under California law, “force majeure…is not necessarily limited to the equivalent of an act of God.”)], COVID-19-related disruptions will not automatically excuse performance since it must still be proven to a court. Indeed, as one California court noted in an unpublished opinion, “force majeure is the equivalent of the common law contract defense of impossibility and/or frustration of purpose: performance of a contract is excused when an (1) unforeseeable event, (2) outside of the parties’ control, (3) renders performance impossible or impractical.” Citizens of Humanity, LLC v. Caitac Int’l, Inc., No. B215233, 2010 WL 3007771 (Cal. Ct. App. Aug. 2, 2010). In this way, even an unforeseeable event outside the parties’ control (i.e., a force majeure event) may not excuse performance unless it is impossible or impractical for the party to perform.

2. Impossibility/Impracticability

What qualifies as “impossible” or “impracticable” is not obvious, and indeed they often blend together. See Habitat Tr. for Wildlife, Inc. v. City of Rancho Cucamonga, 175 Cal. App. 4th 1306, 1336 (2009) (quoting Mineral Park Land Co. v. Howard, 172 Cal. 289, 293, 156 P. 458 (1916) (“a thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost.”). But broadly speaking, “impossibility” typically focuses on the nature of the obligation itself. See El Rio Oils, Canada, Limited v. Pacific Coast Asphalt Co. (1949) 95 Cal. App. 2d 186 (the inability to perform “must consist in the nature of the thing to be done and not in the inability of the obligor to do it.”) “Impracticability” looks at what it would take to perform and asks if the cost, difficulty, or expense are so great that it is unreasonable to expect a party to perform.

Before a business owner looks at the worldwide response to COVID-19 and assumes these doctrines apply, it is important to keep in mind that fundamentally, contracts are all about allocating risk. COVID-19 does not change that. As a result, these doctrines cannot be used as an excuse to perform simply because it is now more costly than anticipated or results in a loss to the party seeking to excuse its performance. See Habitat Tr. for Wildlife, Inc. v. City of Rancho Cucamonga, 175 Cal. App. 4th 1306, 1336 (2009) (quoting Mineral Park Land Co. v. Howard, 172 Cal. 289, 293, 156 P. 458 (1916). Rather, “impossibility as excuse for nonperformance of a contract is not only strict impossibility but includes impracticability because of extreme and unreasonable difficulty, expense, injury, or loss involved.” Autry v. Republic Productions, 30 Cal. 2d 144 (1947) (emphasis added). In other words, if you are able to perform in spite of COVID-19, but it will cost you more money or effort, that may not be enough to excuse your performance unless that additional cost or effort is unreasonable or extreme.

3. Frustration of Purpose

Lastly, there are inevitably going to be a great number of contracts where none of the doctrines above apply but the principal purpose of the agreement has been frustrated by the pandemic (think venues hosting weddings that will no longer be attended by anyone or theaters that have been lined up by promoters for shows that are now cancelled). In such circumstances, “performance remains possible, but the reason the parties entered the agreement has been frustrated by a supervening circumstance that was not anticipated, such that the value of performance by the party standing on the contract is substantially destroyed.” Habitat Tr. for Wildlife, Inc., 175 Cal. App. 4th at 1336.

However, like the other doctrines discussed above, the “frustration of purpose” doctrine is not automatic. To use it, the party seeking relief must establish that “(1) the basic purpose of the contract, which has been destroyed by the supervening event, must be recognized by both parties to the contract; (2) the event must be of a nature not reasonably to have been foreseen; and the frustration must be so severe that it is not fairly to be regarded as within the risks that were assumed under the contract; and (3) the value of counterperformance to the promisor seeking to be excused must be substantially or totally destroyed.” See Peoplesoft U.S.A., Inc. v. Softeck, Inc., 227 F. Supp. 2d 1116, 1119–20 (N.D. Cal. 2002) (case references and internal quotations omitted). COVID-19 does not automatically frustrate all agreements, and so like the other doctrines discussed here, invoking “frustration of purpose” to excuse performance in the face of this pandemic will still require a factual determination of these elements.

Conclusion

It is almost a truism that legal codes will contain maxims that are lofty in spirit but difficult to apply in reality. California is no exception: California Civil Code Section 3526 provides that “No man is responsible for that which no man can control,” while California Civil Code Section 3531 dutifully intones that “the law never requires impossibilities.”

Nonetheless, as discussed above, the reality is that a party will not be absolved of his or her duty to perform under a legally binding contract in the face of COVID-19 absent an applicable force majeure provision or an application of statutory provisions that excuse performance (such as California’s Civil Code Section 1511) or common law defenses like impossibility or frustration of purpose.

So what should parties do? Three things come immediately to mind.

Take a deep breath and call your attorney. As this article should make clear, there are a lot of nuances involved in applying any of these doctrines to excuse (or enforce) performance. Your attorney should be able to analyze the language of the agreement, determine what notice is required to the other party in the event performance cannot be met, and provide guidance on whether any of these doctrines apply.
Recognize the limitations of these doctrines. They apply when a party will incur extreme and unreasonable difficulty, expense, injury, or loss to meet its obligations, but do not expect them to absolve the obligation to perform if there are reasonable alternative methods or resources that can be used to get around the pandemic. Put another way, if performance is possible but additional expense or burden are reasonably incurred, a court will likely not excuse performance, regardless of how unprecedented our present situation might be.
Be practical. This pandemic will eventually subside. If the business relationship is valuable, working with the other side to get through this time will pay dividends later. Have your attorney consult with the other side and start negotiating, especially where commercial leases are concerned.

Finally, if negotiations fall through, litigation may be inevitable. Given the complexity of these issues and the numerous different factors that play into the application of these doctrines, consulting with counsel before taking any further steps is highly advised.

* The information provided in this article is not legal advice and is instead presented as general information and an overview of California law. Readers are encouraged to consult with their attorneys before making any decisions based on the contents of this article. Moreover, employers and employees alike are encouraged to speak with their counsel to determine if and how COVID-19–related emergency legislation may impact these relationships.

** To the best of our knowledge, there are no published California opinions discussing how the principles discussed in this article would be applied to a pandemic or disease outbreak.