Evaluating Performance Escape Options in the Wake of COVID-19

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By Benjamin Hill

As of April 2, 2020, the Coronavirus, or COVID-19, has sickened over 981,000 people on 6 continents worldwide, and has killed over 50,000.^[1] The virus has also had a substantial economic impact, hitting industries such as movie theaters, airlines, and hotels especially hard.^[2] In such an economic climate, companies may find themselves hard pressed to fulfill all of their contractual obligations, and wondering whether the virus triggers any contractual clauses that may terminate their duties to perform. Three such potential options are force majeure clauses, the doctrine of impossibility, and the doctrine of frustration.

Generally speaking, force majeure clauses are those added to a contract to attempt to protect the parties from forces beyond their control.^[3] In Delaware, courts look not merely to the presence of a force majeure clause, but to the specific language and events it describes, such as fires, strikes, and similar phenomena.^[4] Even catch-all phrases such as “or any other reason whatsoever beyond the control of [the parties]” are construed in the context of the preceding listed options, so as not to render the force majeure section all-encompassing.^[5] Under this test, it is likely that Delaware courts would look to see whether the language of the contract included reference to public health related events, such as disease or pandemics, in determining the applicability of a force majeure clause.

Another potential option is the doctrine of impossibility. In Delaware, invoking this doctrine requires the invoker to demonstrate with evidence that “its performance under the contract is rendered impossible by an act of God, law or the other party.”^[6] Furthermore, New York courts have clarified that even were the performance of a contract to result in bankruptcy or insolvency, such difficulties would not rise to the level of contractual impossibility.^[7] Thus, in instances where COVID-19 may have crippled supply lines or reduced workforces, courts may look beyond these factors to determine whether performance is logistically possible, not just financially profitable.

A third possibility for companies seeking a way out of contract performance in the wake of the Coronavirus is the doctrine of frustration. In Wal-Mart Stores, Inc. v. AIG Life Ins. Co., the Delaware chancery court surveyed Delaware’s jurisprudence on the doctrine, and noted five generalizations: (1) the doctrine is very difficult to invoke; (2) it is a question of law to be determined by the court; (3) it requires the party’s main objective to be completely, or almost completely, frustrated; (4) it can only be used to excuse performance, not to compel another party’s performance; and (5) it can only be applied when the circumstances giving rise to the frustration were not reasonably foreseeable at the time of contracting.^[8] Breaking down these factors, COVID-19 is almost certain to be deemed unforeseeable, given the global impact of the pandemic. However, the fact that frustration is a question of law, while simultaneously being vague and ill-defined in Delaware jurisprudence, as the Wal-Mart court notes, means that knowing the proper evidence to prepare for asserting this doctrine could prove tricky.^[9]

In sum, even an event as drastic as COVID-19 may not prove to be a slam dunk for triggering contractual escape clauses and doctrines. Companies hoping to avoid performance in the wake of the pandemic should carefully scrutinize the exact language of the contracts in question, rather than relying on generalized, catch-all clauses. For those whose performance is truly logistically impossible, the doctrine of impossibility may yield a potential out. For the remaining corporations whose contractual obligations simply no longer make financial sense, the doctrine of frustration may be the only option. However, its hazy definitions combined with the power courts hold in its application makes it a potentially difficult doctrine to assert.

[1] Coronavirus Map: Tracking the Spread of the Outbreak, The New York Times (Mar. 24, 2020), https://www.nytimes.com/interactive/2020/world/coronavirus-maps.html.

[2] Stephanie Segal and Dylan Gerstel, The Global Economic Impacts of COVID-19, Center for Strategic and International Studies (Mar. 10, 2020), https://www.csis.org/analysis/global-economic-impacts-covid-19.

[3] Stroud v. Forest Gate Dev. Corp., Nos. 20063-NC, 20064-NC, 2004 Del. Ch. LEXIS 66, at *18 (Ch. May 5, 2004).

[4] Id.

[5] Id.

[6] Bell Atl. Directory Servs. v. Del. Law Ctr., 2000 Del. C.P. LEXIS 55, *2, 2000 WL 33654061.

[7] Rivas Paniagua, Inc. v. World Airways, Inc., 673 F. Supp. 708, 713 (S.D.N.Y. 1987).

[8] Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 872 A.2d 611, 620-21 (Del. Ch. 2005).

[9] Id.at 620.