United States: Will Coronavirus Make Some Contracts Unenforceable?

The spread of the coronavirus, and reactions to it by both public and private actors, have potential implications for the performance and enforcement of contracts. Longstanding contract principles support the enforcement of contracts, but also recognize circumstances can arise after a contract is entered that may excuse or alter performance. The American legal system has not yet had to deal with an issue of the magnitude of a global pandemic which potentially impacts contracts of many kinds on a widespread basis. The coronavirus crisis has the potential to impact contract interpretation and enforcement in ways that may not yet be foreseeable. However, traditional contract principles will likely be the starting point for the analysis of particular contracts in specific situations. The following discussion addresses several principles that may affect contract analysis and interpretation.

Force Majeure

Many contracts contain a “force majeure” clause. Force majeure generally means an unforeseen circumstance that is natural, or that was not created by the contracting parties, which renders at least one party’s performance of a contract impossible. Some force majeure clauses specifically identify the circumstances which may excuse a party’s performance should such circumstances arise. See, e.g., Hearst Commc’ns, Inc. v. Seattle Times Co, 154 Wn.2d 493, 498 (2005) (force majeure clause provided neither party would be liable to the other for any failing from force majeure events such as war or labor strikes). Other contracts may define force majeure more generally. See TransAlta Centralia Generation LLC v. Sicklesteel Cranes, Inc., 134 Wn. App. 819, 823 (2006) (defining force majeure as an event that (i) was not within either party’s control and (ii) which could not have been prevented through due diligence). Some “force majeure” provisions may include “epidemics” as a listed circumstance that can make that clause operational. See, e.g., MD Helicopters Inc. v. Boeing, 2019 WL 3840974 (D. Ariz. 2019).

In the coronavirus context, a contracting party whose performance is impacted by the coronavirus should examine its contract and determine if it contains a force majeure clause. Such clauses may use language addressing pandemics, epidemics, viruses, illnesses, diseases, acts of God and/or government ordered actions, including quarantines, as circumstances that may alter or eliminate contractual performance obligations. See, e.g., Federal Acquisition Regulation 52.249.14 (excusing failure to perform in instances outside of the contractor’s control, specifically outlining epidemics); see also Citoli v. City of Seattle, 114 Wn. App. 1047, 2002 WL 31689411 (2002) (force majeure clause in energy contract allowed t suspension of performance during time of riots and civil unrest). See also Rexing Quality Eggs v. Rembrandt Enters., Inc., 360 F. Supp. 3d 817 (S.D. Ind. 2018), which suggests that a general decline in the market for eggs, or an increase in production costs, may not be sufficient to justify invocation of a force majeure clause by a commercial purchaser, whereas the lack of product due to avian flu negatively impacting egg supply might be.

Act of God

Even absent a specific force majeure clause, contractual obligations and/or damages for non-performance may change or become unenforceable when an “act of God” is present. See Donald B. Murphy Contractors, Inc. v. State, 40 Wn. App. 98, 105 (1985) (stating in dicta that neither party to a construction contract is liable to the other for acts of God unless liability is expressly assumed).

Whether an event constitutes an “act of God” depends on the circumstance. Typically, an event must be: (1) extreme, powerful and/or irresistible in character; (2) not attributable to human action; and (3) not anticipatable. For example, the federal environmental statute CERCLA defines an act of God to mean “an unanticipated grave natural disaster or other natural phenomena of an exceptional, inevitable, and irresistible character, the effects of which could not have been prevented or avoided by the exercise of due care or foresight.” 42 U.S.C. § 9601(1).

Whether a particular act or event constitutes an act of God is usually a question of fact. Franklin Park Mall v. County Roof Coating Contractors, 84 Wn. App. 1085, 1997 WL 31162 (1997). Washington case law recognizes that natural events which are “unusual and unprecedented in character” and that cannot be guarded against with ordinary care may qualify, though liability likely depends on the contract language and the area of law involved. Maplewood Farm v. City of Seattle, 88 Wash. 634, 635 (1915) (listing extraordinary floods, cyclones and lightning strikes as acts of God). While earthquakes likely qualify, id.; see also Grant v. Libby, McNeill & Libby, 160 Wash. 138, 156 (1931), most storms will not. See Wells v. City of Vancouver, 77 Wn.2d 800, 810-11 (1970) (only wind velocities of such extraordinary force that they could not be reasonably anticipated would constitute an act of God).

Even where an act of God is present, in order for it to excuse a party’s duty to perform a contractual obligation, the injury or damage must be solely attributable to such act, and not be attributable in any way to human agency. Thus, where a result is occasioned by an act of God in combination with human negligence, the human actor is still liable for bringing about the loss. See Sado v. Spokane, 22 Wn. App. 298, 3031 (1979); Burton v. Douglas County, 14 Wn. App. 151, 156 (1975); Tope v. King County, 189 Wash. 463, 471-72 (1937).

Finally, for an act of God to excuse non-performance of a contractual obligation, it must render performance impossible. Bullock v. White Star SS, 30 Wash. 448, 454, 70 P. 1106 (1902). More modern authorities have recognized that while the non-performance may not have to be strictly impossible, it must be at least highly impracticable. Oneal v. Colton Consol. School Dist., 16 Wn. App 488, 491, 557 P.2d 11 (1976); 10 Washington Practice, § 10:15.

Act of God in the Disease Context

It is possible that act of God principles may apply to cases involving disease and illnesses, though not with uniform consistency. Some courts do not treat disease or illness as an act of God, see Studebaker v. Cohen, 747 P.2d 274, 276 (Okl. 1987) (act of God “does not include medical problems”), but other courts do so. See, e.g., Stilwell v. Aberdeen-Springfield Canal Co., 102 P.2d 296 (Ida. 1940) (diplopia resulting from exposure to a cold wind was an act of God); see also Guski v. Raja, 949 N.E.2d 695, 698 (Ill. App. 2011) (sudden cardiac death could be an act of God).

Under Washington law, some, but not necessarily all diseases or illnesses may qualify as an “Act of God.” For example, Grover v. Zook, 44 Wash. 489 (1906), involved an action for breach of a contract to marry which was allegedly breached when one party refused to perform the contract due to the other party having incurable tuberculosis. In this case, this illness was considered an act of God which justified either a delay in performance (for less serious diseases) or non-performance (in the event of more serious cases). The court cited authorities noting that, at least in the marriage contract context, “illness, being beyond the power of man to control or prevent, is the act of God.”

When illness is due to an act of God, it must still render contract performance obligation impossible in order to excuse performance. See, e.g., Reynolds v. Travelers Ins., 175 Wash. 36, 44 (1934) (sickness or insanity of insured may make it impossible for the insured to pay the premium, but others could pay it on the insured’s behalf). Similarly, if an epidemic is considered an act of God, a sick workforce may still not excuse performance unless performance is rendered impossible. Rehenback v. Sage, 13 Wash 364, 371 (1896); see also Detroit Fidelity & Sur. v. U.S., 59 F.2d 565, 566 (8th Cir. 1932) (“any illness or disability, the result of disease of conditions beyond the prevention or control of human agency, is regarded as an ‘act of God,’ but, in order to constitute a sufficient defense to relieve one of the consequences of a default or breach of an obligation, the conditions must be such as to render it, within the realms of reason at least, impossible to perform the duty or discharge the obligation”).

As above, illness is not a defense in the face of concurrent negligence. For example, a steamship company was still found liable for injuries suffered by a passenger during a period of quarantined imposed on its vessel due to a smallpox outbreak, notwithstanding a contract provision limiting the carrier’s liability for “Acts of God,” because of the carrier’s negligence. Larsen v. Allan Line S.S. Co., 37 Wash. 555 (1905).

Finally, a number of authorities have recognized that just because an employer chooses to shut down operations due to illness or even an epidemic, this may not suspend the employer’s obligation to pay employees under an employment contract. For example, where a public school was closed for two months by order of the state board of health on account of an influenza epidemic, and the teacher was ready and willing to perform, the teacher was entitled to recover the full salary for the two months; there being no contract provision covering such a contingency. See, Phelps v. School District, 134 N.E. 312 (Ill. 1922).

Impracticality

Circumstances which change after contract formation is also addressed in the Restatement (Second) of Contracts § 261 (1981):

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.

Under the Restatement, market shifts and increased expense alone will not justify non-performance. Rather, unless the contract specifically addresses the issue, performance must be more than simply onerous or expensive – it must be impossible to perform the act required or involve cost of such significance that it is “unjust” to enforce the contract terms. See OWBR LLC v. Clear Channel Commc’ns, Inc., 266 F. Supp. 2d 1214, 1222 (D. Haw. 2003) (9/11 terrorist attacks did not excuse performance under resort reservation contract impracticable for purposes of liquidated damage clause – even if it was inadvisable).

Discussion

Traditional contract principles favor the enforcement of contracts. Contracts containing a force majeure clause, particularly clauses identifying disease, epidemic or government quarantine, may suspend or eliminate a contracting party’s obligation to perform some or all of its contractual obligations. But, enforceability depends on the exact terms used in the contract and area of law. For example, in construction contracts, a force majeure provision may allow for additional time only for delays caused by the force majeure event, but still require the contract to be performed for the same contract amount. In addition, for those contracts that do not have a force majeure clause, a disease like the coronavirus may well be considered an “Act of God” which will also alter contractual obligations. Such a determination would depend heavily upon the law governing the contract. Even then, however, the impacts of the virus will likely have to render performance impossible or highly impracticable to create a defense against a claim of breach. Increased expense alone may be insufficient, especially where parties have predetermined who bears certain risks.

If presented with a contractual obligation that is being affected by the spread of coronavirus, a party to the contract should consider:

  1. Does the contract contain an express force majeure clause?
  2. If so, does that clause eliminate, suspend or alter performance in the event of sickness, disease, epidemic or government action such as quarantine, or otherwise place the burden of such events on one party?
  3. Has the illness impaired the ability to physically perform the contract obligations due to impact on available labor or the supply chain?
  4. Is the expense associated with performance, or potential financial losses associated with performance, of such a magnitude as to make performance effectively impracticable?
  5. Whether the ability to perform a contractual obligation is affected by federal, state or local government action, including emergency declarations and activity restrictions?
  6. If so, does the existing contract language address such contingencies?

Finally, if it appears that one or more of these circumstances is present, a party should consider approaching the other parties to the contract and discussing the performance issues in light of the circumstances. It may be possible to accelerate performance before labor or supply chains are effected, negotiate a new deal, or agree to suspend or cancel an existing one. Regardless, parties must be cognizant of any notice requirements if making a claim under any force majeure clause, which are critical in Washington. Being proactive now may well help avoid legal entanglements that may arise in the aftermath of the virus.