Contract Performance During COVID-19 Pandemic
March 23, 2020
The COVID-19 pandemic has caused unprecedented disruption to the way we all live, work, and interact. For individuals and businesses, questions quickly arise regarding the legal obligations of performance required under their contracts based on this unforeseen worldwide pandemic. This is a brief overview of contract law in Maryland that may be applicable to contract issues arising under the circumstances.
Does your contract contain a force majeure provision? Typically, such a provision would read akin to the following:
The Party shall not be liable for any failure or delay in the performance of its duties to the extent the failure or delay is caused by a force majeure or event beyond its reasonable control, including, but not limited to, any fire, act of God, war, government action, act of terrorism, epidemic, pandemic, natural disaster or other major upheaval. If such an event occurs, the Party’s duties and obligations will be suspended immediately and without notice, until such time as the Party, in its sole discretion, may safely perform its duties. If performance is not possible due to such event, performance of duties is excused.
“By definition, a force majeure event is an event unlikely to occur.” Phx. Servs. Ltd. P'ship v. Johns Hopkins Hosp., 167 Md. App. 327, 374 n.19, 892 A.2d 1185, 1212 (2006). If the contract is excused, it generally results in a complete cancellation without penalty. Courts tend to interpret force majeure clauses narrowly.
There are many contracts, however, that do not contain explicit force majeure provisions. In such circumstances, Maryland courts generally apply common law contract doctrines, such as the doctrines of frustration of purpose and impossibility of performance.
The principle underlying the frustration of purpose doctrine “is that where the purpose of a contract is completely frustrated and rendered impossible of performance by a supervening event or circumstance the contract will be discharged.” Harford County v. Town of Bel Air, 348 Md. 363, 384, 704 A.2d 421 (1998) (citing Montauk Corp. v. Seeds, 215 Md. 491, 499, 138 A.2d 907 (1958)). Courts apply three factors to determine whether this doctrine applies: (1) whether the intervening act was reasonably foreseeable; (2) whether the act was an exercise of sovereign power; and (3) whether the parties were instrumental in bringing about the intervening event.
Under the doctrine of impossibility of performance, the Maryland courts have stated:
"It is a general rule of the common law that when the impossibility of performance arises after the formation of the contract, the failure of the promisor to perform is not excused. This rule was founded on the theory that if the promisor makes his promise unconditionally, he takes the risk of being held liable even though performance should become impossible by circumstances beyond his control. The unjust consequences of this general rule gave rise to certain exceptions. One of these is that a contractual duty is discharged where performance is subsequently prevented or prohibited by a judicial, executive, or administrative order, in the absence of circumstances showing either a contrary intention or contributing fault on the part of the person subject to the duty. . . . But an order which interferes with the performance of the contract is not an excuse if the circumstances surrounding the formation of the contract are such as to indicate that the possibility of such interference was recognized and the risk of it was assumed by the promisor."
Levine v. Rendler, 272 Md. 1, 7-8 (1974).
Thus, where parties find themselves without a force majeure provision in their contract, the doctrines of frustration of purpose and/or impossibility of performance may provide relief from contract performance based on the COVID-19 pandemic and related executive orders.
This article is a general overview of certain contract law principles and is not to be considered legal advice. In addition, it is important to understand that contract law generally varies from state to state and contracts governed by the laws of other states may be subject to different interpretations. To get specific advice for your contractual circumstances, you should contact your attorney who will analyze the applicable facts, the contract, and applicable law.