The current coronavirus pandemic has caused local and national disruptions that will have a short and long term effect. These disruptions have affected our schools, jobs, and businesses. Some of us might be wondering how a contract we signed might be affected by this pandemic. Parties to a contract can attempt to negotiate around these disruptions. But what if the parties cannot come to an agreement? What follows is a description of some legal doctrines that could be implicated in such contractual scenarios.
Force
Majeure
A standard clause found in
contracts is the force majeure/impossibility clause (hereinafter “force
majeure”). Force majeure is when an extreme event beyond the control of
the obligor arises and prevents the impacted party from performing the
contract. An example of this is when a natural disaster prevents an obligor
from delivering goods or services. If the natural disaster prevents the obligor
from performing, then the obligor can be excused from performing because of the
force majeure event.
Things
to consider in a matter that involves force majeure
- “Is the extreme event listed in the force majeure clause?”;
- If the event is not listed, then the obligor is not excused from performance and will be in breach of the contract if he does not perform even if a non-listed event does occur.
- “Which party is bearing most of the principal non-payment obligations?” (whoever is that party is the primary beneficiary of a force majeure clause);
- In a sale of goods transaction, the seller bears the principal non-payments obligations and therefore, would want a broad force majeure clause.
- “Do the parties have the ability to terminate the contract if a force majeure event continues for a certain length of time?”
- “Does the dispute resolution clause (if there is one) apply to the force majeure clause, or does it go straight to the court?”
- Research shows that force majeure-related events are typically arbitrated.
- “Is the force majeure event covered or excluded by the parties’ insurance policy?”
- “What duty does the obligor have to the other party(ies) if a force majeure event occurs? Does he have to mitigate? Notify the obligee(s)?”
List
of Force Majeure Events:
- Natural disasters (floods, earthquakes, severe weather)
- Pandemics, epidemics, quarantines
- Violence such as war, terror attacks, civil unrest
- Government action (eminent domain, condemnation, changes in laws/regulations, a government’s authority failure to act on a timely basis)
- Organized labor activities, strikes
- Have to look at if the obligor caused the strike (lockout of employees or bad faith bargaining)
- Shortages of power, supplies, transportation, and infrastructure
- Have to look at if the obligor caused the shortage or could have planned ahead.
List
of Force Majeure Events that are excluded
- Changes in economic circumstances
- Subcontractor defaults
- Equipment failure
- Banking system failure
How
have Wisconsin Courts interpreted and applied Force Majeure clauses
A Plaintiff argued that a lease
continued in effect beyond a date under its force majeure clause.[1]
The Plaintiff alleged that the combination of private and governmental inaction
constituted a force majeure event.[2]
The contract in Goldstein stated that
the duration of the lease would be extended for a period equal to the period of
force majeure event.[3]
The court in Goldstein held that
because it is presumed that parties to a contract know what laws and
regulations will affect the ability to get a permit; thus, the failure to
obtain the permit is not deemed a force majeure event. The court, in this case,
also noted that only one party had the right to invoke the force majeure
clause, and that was not the Plaintiff.
What
if the contract/agreement does not have a “Force Majeure” clause?
Doctrine
of Impossibility or Impracticality
If a contract contains no force
majeure clause, then the doctrine of impossibility or impracticality might be
invoked. These two doctrines excuse the obligor from performing under a
contract if the performance is excessively burdensome due to an unforeseeable
event that is not within the obligor’s control.
Although there is not a lot of
Wisconsin law precedent regarding the doctrine of impossibility or
impracticality, there is Wis. Jury Instruction(JI)—Civil 3062. Which provides
that:
“If
performance of a contract is possible only if a certain state of facts
continues to exist, then a cessation or termination of the state of facts which
makes performance impossible will excuse failure to perform. But if performance
becomes impossible by reason of contingencies which should have been foreseen
by a party, then such party is not excused from the duty to perform.”
A
court would look at the facts and determine if the case satisfies the
excessively burdensome standard. The Covid-19 pandemic is a unique circumstance
that might allow a party to invoke one of these doctrines. A court would first
have to look at a number of factors, some of which are considered in force
majeure, to determine if one of the doctrines excuses nonperformance.
Frustration
of Purpose Doctrine
Frustration of purpose doctrine applies to
contracts for goods and services. It is different from the doctrine of
impossibility/impracticality because it can be invoked in cases where an event
fundamentally changes the purpose of the contract. If the principal purpose of
the contract is frustrated, at no fault of a contracting party, then the
doctrine may apply to excuse nonperformance.
There is a high bar to meet when invoking this doctrine because the
frustrating event must have been a primary purpose of entering into the
contract. Furthermore, the event at issue must not have been within the risks
contemplated by the contract.
Wisconsin
courts have held that to render a contract unenforceable because of a
frustration of purpose, it requires that (1) the party’s principal purposes in
making the contract is frustrated; (2) without that party’s fault; (3) by the
occurrence of an event, the non-occurrence of which was a basic assumption on
which the contract was made.[4]
The court in In re Estate of Shepard determined
a contract was enforceable because a flight instructor could no longer teach a
student, due to the student’s death. [5]
Conclusion
Rizzo & Diersen S.C. is here to
help you or your business navigate these legal issues. Contact our office at
262-652-5050 with any questions you may have regarding the coronavirus pandemic
disruptions.
[1]
Goldstein v. Lindner,
2002 WI App 122, ¶ 20
[2] Id. at ¶ 29.
[3] Id. at ¶ 30.
[4] In re Estate of Sheppard, 2010 WI App 105 at ¶ 13.
[5] Id.
at ¶ 15.
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