The Era of Corona Contract Law is Coming: Negotiating in the Shadow of Force Majeure, Impossibility, Impracticality.

The Era of Corona Contract Law is Coming: Negotiating in the Shadow of Force Majeure, Impossibility, Impracticality.

Executive Summary:

The primary focus right now is on health and safety. But when the pandemic ends or slows there will be many commercial claims – disputes about the non-delivery of goods and services.

This blog suggests that businesspersons should first consider their attitude in approaching such problems. Times like this call for a certain degree of understanding, flexibility, and a willingness to solve problems. The idea is to get back into business; not relive the crisis each time there is a business dispute.

The legal analysis will turn on two main factors: the contract itself, especially if it contains a “force majeure clause” and the doctrine of “impossibility.”

In the midst of a world-wide pandemic, our thoughts are of health and safety. But we can look forward to the day when we consider questions such as: “I could not deliver the goods or services I had promised because I was quarantined. Am I liable?” Or, “my yoga studio stopped providing services, do I have to pay them?”

This blog considers the sale of services and goods and how we might work through problems that will get the commercial world back in gear. We first consider a notion that is often secondary in business law analyses: what is the right attitude to bring to these problems? We will next discuss the legal principles and then conclude with some pragmatic approaches to anticipated business issues. In order to explore this topic, we will rely on the following hypothetical situations:

  • A power plant that was supposed to open on April 30, 2020 contracted with a supplier for a critical part for the its new turbines from its single factory. The contract indicated that “time was of the essence” and the supplier agreed to “delay damages” of $100,000 per day. Because of various “stay at home” orders issued by the state government, the supplier did not have the work force to supply the parts and delivery was 20 days late. [“Missing Parts Case”]
  • John Bigbucks hired the well-known entertainer – DJ Virus – to perform at his only daughter’s wedding. The wedding was moved to Singapore in order to provide a location outside the “trouble zone” for the Coronavirus. One day before the wedding, Singapore declared that it would refuse entry to any passengers from the United States, even if they tested negative upon arrival. Bigbucks had paid DJ Virus half of a $1,000,000 special services fee as a deposit, which Bigbucks wants back; plus damages. [The “Missing DJ Case”]

When considering contracts for sale, there are four important sources that should be consulted: (1) The contract itself – and, specifically, the force majeure clause – which is an agreement as to what would happen if an event totally beyond the parties’ control arose; (2) With regard to the sale of goods between merchants, Article 2 of the Uniform Commercial Code (the “UCC”) (there are additional “consumer laws” regulating sales to consumers); (3) for contracts for services and for general contract principles, the Restatement 2d of Contracts; and (4) Particular decisions of the courts in the various states. In this blog, we will focus on (1) – (3) because to a very large extent, the UCC and the Restatement reflect the general law in all 50 states and the District of Columbia. Some states have made modifications to the standard UCC and Restatement rules so you should check with your attorney as to the particular  UCC or Restatement rules that apply in your state.

  1. Consider Your Attitude: We Are All In This Together.

One fine day, we will find that we are slowly clawing out of this unprecedented time when our lives were dominated by Covid 19. Around this same time (and perhaps even before), many of us will receive calls and emails from business associates – suppliers, customers, service providers, manufacturers, processors – that there is a grievance about something that was supposed to happen that did not happen, ostensibly because of the virus and its impact (a service not fulfilled; a product not delivered).

Before we get into the legalities, the Covid 19 pandemic is most certainly an unexpected tragedy. Thousands of people around the world died and (depending on when you read this) thousands more will die. Hundreds of millions around the world are living or have lived in fear and anxiety for months. Governments are issuing and have issued unprecedented orders. In circumstances like this, although all of us want what we fairly deserve, a bit of understanding, flexibility, patience, and resourcefulness is certainly appropriate. As a society and on an individual basis, our goal should be to move back to normal commercial life as gracefully and quickly as possible. Although law is my industry and litigation is sometimes necessary, I hope to help my clients find a practical way to resolve a problem, maintain business relationships, and move on to better times. If possible, I want to help my clients avoid reliving the Covid 19 virus with each new commercial problem.

Perhaps, businesspersons should consider the following factors with regard to each Covid-related dispute:

  • Given the circumstances, is it reasonable for me to demand what I expected, or should I seek to obtain what I need? What would be fair?
  • Did the party who did not deliver contact me as early as possible to explain the situation and apologize for the failure?
  • If I were in the position of the other party, how would I want to be treated? Would I want to be treated the way I am proposing to treat this other party?
  • Instead of focusing on past disappointments, is it possible to make accommodations with regard to future business that will make it possible for both sides to reduce the “sting” of the losses caused by Covid 19? Are there other creative solutions available?
  • Can you approach the disappointment of non-delivery as a “problem” that you and your trading partner can both resolve together?

As a client and businessperson, you can control your own attitude about how you will approach Covid 19 business problems. Your attitude may be the most important factor determining your success in coping with Covid-19 business disputes and returning to “normal.” Find a business lawyer who understands your approach and can help advise or conduct the negotiations so that your intentions are fulfilled.

  1. Does the Contract Have a Force Majeure Clause?:

As in most business disputes, the first step is to look at the contract between the parties. Many contracts contain a provision known as a “force majeure” clause. A typical force majeure clause looks something like this:

Force Majeure. Any delay in or failure of performance by either party under this Agreement will not be considered a breach of this Agreement or a basis of delay damages and will be excused to the extent caused by any occurrence beyond the reasonable control of such party including, but not limited to, acts of God such as fires, hurricanes, floods, or tornadoes.[1]

The force majeure clause attempts to make rules for unanticipated events that might interrupt the parties’ expectations. One function of a contract is to allocate and structure risks between the parties. The force majeure clause above defines triggering events as “any occurrence beyond the reasonable control” of the party that failed to perform. We then have a “list” of examples described as “acts of God” that includes (but according to the language, is not limited by), fires, hurricanes, floods, or tornadoes. It seems quite clear that some of the results of the Coronavirus were beyond either parties’ control. Therefore, the question becomes whether the limitation caused by the virus resulted in consequences that were beyond the control of the party that failed to perform.

Turning to the Missing Part Case, it would seem that the failure to deliver on time would be excused by the force majeure clause. The supplier was ordered to close, and the workers were ordered to stay home. Under such circumstances, unless the Buyer, could demonstrate that it was reasonably foreseeable that the “shut down” order would come and the Buyer “should have” anticipated the problem and adjusted its production schedule accordingly, the force majeure clause would seem to excuse the delay.

On the other hand, a clause like this in the case of the Missing DJ is much more difficult. Based on the fact pattern, it appears that both parties understood that special arrangements were being made in order to avert a shut-down of the wedding party by the Coronavirus. Generally speaking, force majeure clauses apply only when the event which allegedly caused the failure was beyond control and unforeseeable.[2] In this case, DJ Virus knew that he had to be in Singapore on a particular day. Air travel was unstable and changing each day. He knew he was travelling from the U.S. to a country known to take quick action to assure the health of its residents. It was within DJ Virus’ control to leave for the wedding gig a few days early and to develop strategies and back-up plans to get to the wedding on time. His failure to do so when he knew he was being asked to perform in Singapore partly due to the global Corona crisis may leave him liable in spite of the force majeure clause.[3]

Force majeure clauses can provide some guidance to parties involved in Covid 19 disputes, but many force majeure clauses have procedural and other limitations that will cancel the application of the clause. For example, many force majeure clauses require immediate notice by the party invoking the force majeure as soon as the condition is known to the party that cannot perform. If those procedural requirements are not met, the clause may be invalidated. However, even if there is no force majeure clause, or even if the force majeure does not cover the situation involved, there are other doctrines in the law that will impact the results in Covid 19 disputes.

  1. Impossibility and Impracticality:

Although the sale of goods is controlled by Article 2 of the UCC and the sale of services falls under contract principles described in the Restatement 2d of Contracts, the relevant provisions of both have some similarities:

Delay in delivery or non-delivery in whole or part by a seller … is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made[.] UCC §2.615(1). [Applies to sale of goods between merchants][4]

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. Restatement (Second) of Contracts §261). [Applies to sales of services and other contracts] It is interesting that both provisions refer to the “basic assumptions” of the parties to the contract. Generally, parties to a contract do not “assume” that the entire world is going to be threatened by a global pandemic. Parties generally also assume that governments all over the globe will not shut them down, will not order their employees to stay home, and will not forbid residents from meeting with each other or entering restaurants, schools, movie theaters, or cafés. Both the UCC and the Restatement require two general elements: (a) that an inherent assumption about something that would not happen (a pandemic) or something that would happen (normal business around the world) has rendered it “impractical” to deliver the service or deliver the goods.”[5] Courts interpret the term “impractical” objectively. It is not enough that you were unable to do what was required by the contract due to your own limitations. It is necessary that – objectively – not just that the party obliged could not do it — but that it simply could not be done as agreed.[6]

Turning to our hypotheticals, once more, the Missing Parts Case reflects a situation where it was objectively impractical for the parts manufacturer to perform the contract. Even if the manufacturer paid extra for labor, he would have to break the law and cause his employees to break the law in order to fulfill the contract. It might be important that he had only one factory in one place and this was known to both parties. This is a strong example of “objective impracticality.” It’s not that it was too expensive to do it. It just could not be done in that factory. On the other hand, once more, we have a question as to whether with prudent planning and proper effort, DJ Virus could have made it to the wedding. We do not know what efforts DJ Virus made to get to Singapore on time and the full range of constraints on his travel, but given that it was foreseeable that travel would be difficult, it is not likely that his non-performance is excusable.

  1. Conclusion:

Charles Dickens, in Oliver Twist, popularized the famous phrase through his character, Mr. Bumble that, “The law is a ass – a idiot.” Actually, however, U.S. commercial law was consciously crafted to assure that the law would not be a donkey, but that it would work in a manner that made sense to parties engaged in commerce.[7] In other words, the law attempted to capture the long history of practices and accommodations developed by merchants and businesspersons over hundreds of years of commerce.. The provisions discussed in this short blog set some of the parameters for discussing non-performance in the midst of a plague. However, each situation may be just a bit different and each non-performance may have its own story that may prove persuasive to a judge, a jury, or a party to a contract.

As a society, we have been severely challenged to cope with and survive this virus. And as a society, we will also have to cope with its aftermath. Although the law can be of some help, the speed of our recovery will be greatly guided by the common sense, flexibility, resourcefulness and kindness of all of us who are working to find our way back to a semblance of normal.

By Arthur Chaykin, Kennyhertz Perry, LLC

Arthur Chaykin is head of Kennyhertz Perry’s Intellectual Property practice. He was formerly a Vice-President of Law at the Sprint Corporation where he served as, in succession, their chief litigator, the head of the business law department, and Vice President of the first legal department at Sprint supporting marketing and sales in all areas of Sprint’s business: international, wireless, wireline, local and long-distance services. At Sprint, he also served as the head lawyer for Sprint Ethics and Compliance program. He has since served as General Counsel to a major manufacturer and distributor of automotive lifting equipment and automotive accessories and has represented numerous clients on trademark matters, copyright cases, trade secrets disputes, food safety regulatory issues, and consumer product safety issues. has over 35 years of legal experience handling trademark, patent, copyright, and trade secret litigation and arbitration.

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[1] McChristian, Force Majeure: Hurricane Harvey Made Performance Impossible – Now What? (Texas Bar Journal April 2018). The author of this blog is grateful to Mr. McChristian for his cogent and straightforward analysis of these issues under Texas law. This particular clause was provided by Mr. McChristian.

[2]force majeure clause is a “contractual provision allocating the risk if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled.” Clean Unif. Co. St. Louis v. Magic Touch Cleaning, Inc., 300 S.W.3d 602, 610 (Mo. Ct. App. 2009) quoting BLACK’S LAW DICTIONARY.

[3] The distinction between whether the loss was unforeseeable and beyond control is often phrased in terms of whether the force majeur clause is “triggered.” The clause is not “triggered” if the impact was actually the result of a non-force majeur event. See, Welsch v. Trivestco Energy Co., 43 Kan. App. 2d 16, 28, 221 P.3d 609, 617 (2009).

[4] Missouri and Kansas Law: Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:

(a) Delay in delivery or nondelivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

(b) Where the causes mentioned in paragraph (a) affect only a part of the seller’s capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.

(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.

Kan. Stat. Ann. § 84-2-615 (West); Mo. Ann. Stat. § 400.2-615 (West).

[5] An event that reasonably could have been anticipated at the time of contracting does not excuse the obligor’s performance under these doctrines because if the event reasonably could be foreseen and the contract does not provide for performance to be excused if the event occurs, we presume that the parties intended the obligor to assume this risk. Clean Unif. Co. St. Louis v. Magic Touch Cleaning, Inc., 300 S.W.3d 602, 608 (Mo. Ct. App. 2009).

[6] A distinction is also drawn between impracticability which is “subjective” and “objective.” This has been described as the difference, respectively, between “I cannot do it” and “the thing cannot be done.” See State Highway Construction Contract Cases, 161 Kan. 7, 67, 166 P.2d 728 (1946). Only objective impracticability may serve to relieve a party of his or her contractual obligation. Sunflower Elec. Co-op., Inc. v. Tomlinson Oil Co., 7 Kan. App. 2d 131, 139, 638 P.2d 963, 970 (1981). This case contains an excellent discussion of “subjective” and “objective” impossibility.

[7] W. Schaneder, A Short History of the Preparation and Enactment of the Uniform Commercial Code, 22 University of Miami Law Rev. 1 (1967). “There was no difficulty in finding a “Chief Reporter.” The outstanding man in the United States to undertake this task was Professor Karl N. Llewellyn of the Columbia University Law School. Not only was Professor Llewellyn a student of commercial law as it appeared in the law books, but he was the type of law professor who was never satisfied unless he knew exactly how commercial transactions were carried on in the market place. He insisted that the provisions of the Code should be drafted from the standpoint of what actually takes place from day to day in the commercial world rather than from the standpoint of what appeared in statutes and decisions.” Id. at 4.