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Coronavirus (COVID-19): Excusing Contract Performance Coronavirus (COVID-19): Excusing Contract Performance

Coronavirus (COVID-19): Excusing Contract Performance

As the impact of COVID-19 seems to spread exponentially by the hour, so too does the disruption to global supply chains. While most businesses long ago (weeks in COVID-19 time) reviewed their supply chain contracts’ force majeure provisions (see our prior alert here: www.icemiller.com/ice-on-fire-insights/publications/coronavirus-disease-(covid-19)-a-force-majeure-e/), recent COVID-19 federal, state and local government containment restrictions bring into play other contract law doctrines such as impracticability, impossibility and frustration of purpose. Each of which can serve to excuse contract performance.

Impracticability: The Uniform Commercial Code, which covers contracts for the sale of goods, excuses performance where it is impracticable. This occurs where a supervening event changes the inherent nature of the performance to be more difficult, complex or challenging to the point that it contravenes a basic assumption of the parties’ agreement. For example, a severe shortage of raw materials or supplies due to a contingency, such as war, embargo, local crop failure or an unforeseen shutdown of major sources of supply, is likely to excuse performance.[1]

Impossibility: Impossibility occurs when performance is “absolutely impossible.” To invoke impossibility, one must demonstrate performance is not merely more difficult or relatively impossible, but absolutely impossible, owing to the act of God, the act of the law or the loss or destruction of the subject matter of the contract. The inability to perform under a contract due to financial reasons will not generally discharge a contract for impossibility. In one instance, the Indiana Court of Appeals has held that a school closing because of an influenza epidemic rendered a teacher’s employment contract impossible to perform, and the school board was not required to compensate the teacher for the time the school was closed.[2] 

Frustration of Purpose: Frustration of purpose occurs where one party’s known principal purpose for entering a transaction has been obviated by a supervening event. Many courts require a party to establish that the purpose that was frustrated is a principal purpose of that party in making the contract, that the frustration was substantial and that it concerned a basic assumption on which the contract was made. For example, in one case, performance was excused where a manufacturer had agreed to an exclusive distribution contract with a distributor. Through no fault of the manufacturer, the only major purchaser of that product became unwilling to deal with the distributor. The court allowed the manufacturer to claim it was excused from performance because its purpose—distributing the products—was completely frustrated.[3] 

In general, each of these doctrines is narrowly construed and applied. The application and requirements vary from state to state, so it is important to assess the requirements under the applicable state law. However, each of the doctrines will continue to become increasingly relevant as additional governmental restrictions are put into place and performance becomes increasingly difficult. 

Ice Miller attorneys are able and available at any time to address your COVID-19 supply chain legal concerns, including providing guidance and assisting with questions regarding the force majeure, impracticability, impossibility and frustration of purpose doctrines. Contact Drew Miroff, Christina Fugate or Meredith Wood for more information.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
 
[1] U.C.C. § 2-615, cmt. 4.
[2] See Gregg Sch. Township v. Hinshaw, 132 N.E. 586 (Ind. App. Ct. 1921).
[3] See Viking Supply v. Nat'l Cart Co., 310 F.3d 1092 (8th Cir. 2002).
 
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