Client Alert: Addressing Contract Performance Impacted by the Coronavirus under District of Columbia Law
Date: April 8, 2020
Even if a business in the District of Columbia is able to continue to operate under all of the ongoing circumstances related to the COVID-19 pandemic, it may not be able to conduct its operations as it normally would. The lack of customers or other factors likely means that revenues are well below typical levels. Without expected revenues, a business may not be able to meet its own obligations such as rent, payroll and other expenses. In the event the business is not able to perform certain contractual obligations because of the ongoing circumstances related to the COVID-19 outbreak, it will need to look at each specific contract to understand the potential liability of such nonperformance. This advisory reviews several considerations related to the issue of contractual nonperformance under D.C. law.
Contractual Clauses
Many contracts include some sort of termination or cancellation provision that specifies the circumstances in which a party may terminate a contract. It may require that a certain period’s notice be given or that the other party have breached the contract. If a business terminates or cancels a contract or simply doesn’t perform without a full understanding of the termination provisions of its contract, it could find itself still liable for the performance of all or substantially all of its obligations under the contract.
If the termination provisions do not provide an easy means of avoiding contract performance, the next step would be to examine whether there is a “force majeure” clause in the contract. A “force majeure” clause typically excuses in varying degrees one or more obligations of the parties to the contract in a situation where one or both parties cannot perform its obligations due to circumstances beyond the parties’ control. However, it is important to carefully review the specific language of the force majeure clause to determine what is considered a force majeure event and how that event affects one or more obligations of the parties.
Depending on the specific language, a party may be able to terminate the contract or be excused from performance without impunity. Some examples of force majeure events would be “Acts of God” (typically construed to mean an event of nature such as an earthquake, tornado, hurricane, etc.), wars, government interference, labor disputes, terrorism, curtailment of transportation or other emergency of comparable nature or, in light of today’s world, an epidemic, pandemic or quarantine. If the specific event is not included, then it’s likely the force majeure provision will not apply.
Additionally, a party is usually only able to invoke the force majeure provision if the particular event makes it impossible or illegal for that party to perform its obligations. Some contracts may have broader language and allow application of the force majeure provision under other circumstances. Either way, it’s important to review the specific language of each force majeure clause to ensure that it applies because the courts in the District of Columbia have construed such provisions very strictly, meaning that the court will enforce the specific written terms in such clause as closely as possible. The courts will generally not allow termination or force majeure rights if such clauses are not expressly written into the contract and if a contract has a force majeure clause, the courts will not expand that clause beyond the specific language it contains.
Other Defenses for Nonperformance
Even if a business that has been impacted by the COVID-19 pandemic is unable to terminate a contract under a termination or force majeure provision, courts in the District of Columbia have excused performance of contractual obligations under the doctrine of impossibility or commercial impracticability.
Doctrine of Impossibility or Commercial Impracticability
The courts in D.C. have found that a party’s obligation to perform under a contract may be excused if performance is rendered impossible or commercially impracticable. To establish impossibility, the party seeking to be excused must show: 1) there was an unexpected occurrence of an intervening act; 2) the risk of the unexpected occurrence was not allocated to it under the contract; and 3) the unexpected occurrence made performance by the party seeking to be excused impractical. However, the doctrine of impossibility or commercial impracticability only applies when the circumstances are extreme. And even if the circumstances are extreme, the party seeking to have its performance excused will have to show that the performance was objectively impossible and not due to an inconvenience or unexpected difficulty related to the performance. Additionally, objective impossibility also requires that the nature of the act to be performed is impossible and does not excuse performance simply due to a party’s inability or incapacity. Therefore, financial inability to perform is generally not an excuse under the doctrine of impossibility or commercial impracticability. But, if in the case of the COVID-19 pandemic, the nature of the act contemplated by the contract (e.g., a contract to hold a conference) has been made illegal or impossible due to the intervening act of government orders that prohibited private gatherings, then a business may be able to claim a defense of impossibility or commercial impracticability.
____________________
Unfortunately, we are in unique, once-in-a-lifetime circumstances and there is not significant guidance with respect to how courts in the District of Columbia will apply force majeure clauses and the other doctrines discussed in this advisory to the many contractual relationships affected by the events caused by the COVID-19 pandemic. Historically, such courts have taken a restrictive approach and it is not clear if that approach will change for businesses that have been negatively impacted by the economic fallout from the pandemic.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.