COVID-19 and Contracts – Legal Issues in Maryland

Although much has been written about the Coronavirus Aid, Relief and Economic Security (CARES) Act and its companion relief programs, less has been written about the legal ramifications for businesses as a result of the widespread economic shutdown.  From commercial leases to construction projects to supply-chain relationships, businesses are likely to take a hard look at their contracts to see what their rights and obligations are in this unprecedented time.

In dealing with the inevitable litigation, lawyers will likely focus on three contractual defenses: (a) force majeure, (b) impossibility, and (c) frustration of purpose.

Force Majeure

A force majeure provision excuses a party’s performance under certain circumstances.  It is sometimes colloquially referred to as an Act of God and literally translates to “a superior force.” As with any contractual provision, the most important analysis is the clause itself – what does it actually say, what does it provide, what are the triggering events, is there even such a clause in the contract at all, etc.?

Some jurisdictions (Texas, for example) take a narrow view of force majeure clauses and refuse to read into them any additional common law requirements. In line with this view, courts start – and end – with the language of the clause itself. Others (California, for example) take an expansive view and read into the provision two additional requirements:

            •           that the triggering event is beyond the reasonable control of either party; and

            •           that the event is unforeseeable.

Similarly, Maryland courts define an Act of God as “a natural necessity, which could not have been occasioned by the intervention of man, but proceeding from physical causes alone, such as the violence of the winds, or seas, lightning, or other natural accidents.” Put another way: the parties cannot have caused, or contributed, to the claimed damages. 

In the end, it is likely that a court will not excuse performance if the triggering event is foreseeable because the parties could have allocated the risk in the contract itself.  In the event of the coronavirus pandemic, which most would argue was neither foreseeable nor within the control of the parties, one should expect a force majeure defense.  But, the force majeure provision must be in the contract.  If not, then read on.

Impossibility and Frustration of Purpose

Impossibility and frustration of purpose are two common-law (putting aside the UCC) contract defenses that practitioners raise more often than force majeure and with which they are more familiar. 

The frustration of purpose doctrine comes into play “where the purpose of a contract is completely frustrated and rendered impossible of performance by a supervening event or circumstance, [then] the contract will be discharged.” 

In order to claim frustration of purpose, three factors must be met:

            •           whether the intervening act was reasonably foreseeable;

            •           whether the act was an exercise of sovereign power; and

            •           whether the parties were instrumental in bringing about the intervening event. 

The legal impossibility doctrine is similar: “If a contract is legal when made, and no fault on the part of the promisor exists, the promisor has no liability for failing to perform the promised act, after the law itself subsequently forbids or prevents the performance of the promise.” Contracting parties should note that increased costs or difficulty in performance will not rise to impossibility, and courts will not allow a party to back out of a bad deal.