Does a pandemic allow a party to get out of a contract?
A pandemic could make it more difficult for parties to perform their obligations under many types of contracts — including real estate contracts, leases, and other real estate documents. If one of the parties to a contract is unable to perform as a result of an actual or potential coronavirus outbreak or another pandemic, does the legal doctrine of “force majeure” or “An Act of God” allow the party to suspend performance under a contract or terminate it altogether?
Whether Contractual Force Majeure Provisions Apply to the Coronavirus
In many real estate contracts, one or more contractual provisions will specifically address the parties’ rights in the event of a so-called “force majeure” event. Whether a party can be excused from a contract on account of force majeure event is fact-specific and will largely depend on the nature of the party’s obligations and the specific provisions of the contract. In a situation like the coronavirus, the parties’ obligations will largely depend on, among other factors:
• The extent to which the parties’ addressed force majeure in their contract and the extent to which the legal ramifications of such a clause were addressed;
• Whether or not the parties addressed various “factors” to consider if a party seeks to utilize the force majeure clause;
• The extent to which the outbreak actually prevented a party from performing; and
• Whether the party asserting the force majeure provision had any ability to “mitigate” or reduce the effects of the pandemic on its ability to perform.
Parties seeking to assert force majeure should also review their contracts to determine whether specific notice must be provided to the other party—and whether there are time limits to provide notice of a force majeure event.
What if a Contract Does Not Contain a Force Majeure Provision?
If a contract does not contain a force majeure provision, or if the situation does not merit the use of a force majeure clause, the doctrine of “frustration of purpose” may apply. This doctrine may also excuse the performance of a contract if, for example, the subject matter of the contract or means to perform the contract have been destroyed or are impossible to perform. Additionally, if the central purpose of the contract has been “frustrated” by an event that the parties could not have contemplated at contract formation, the doctrine of “frustration of purpose” may apply.
The timing of contract formation will play a crucial role in determining whether a potential or actual coronavirus pandemic constitutes a frustration of purpose. Those who entered into contracts before December 2019 or January 2020 will likely have an easier time proving frustration of purpose because they had no reason to anticipate a pandemic. By contrast, if parties enter into a contract after the declaration of a pandemic, then proving “frustration of purpose” will be much more difficult.
In short, the ability to assert force majeure to get out of a contract is typically governed by the provisions of the parties’ contract. Whether a potential or actual coronavirus pandemic is a force majeure event will typically depend on the language of those provisions, as well as the extent to which the coronavirus made a party’s performance impossible. Another factor is the timing of when the parties actually entered into the contract. Because every contract is different and every project is unique, it is advisable to consult with an attorney to evaluate what can be done with a contract.