While many Washington-based restaurants still provide “carry-out and quick-serve food operations” under Governor Jay Inslee’s business-closure order, their ability to generate revenue has been severely impacted. Technomic, a restaurant industry research group, reported that consumer spending on food service is down 45 percent from a typical week in February, with further planned reductions expected to come.[1] Survey results also show that people are concerned about ordering take-out. A Dataessential survey has revealed that 34 percent of customers believe that limited-service restaurants are “high-risk.”[2] Moreover, although there is no evidence of COVID-19 transmitting through food or packaging, the general public’s avoidance of physical contact has wreaked havoc on local businesses. According to a New York Times article, Seattle chef Tom Douglas has shuttered his dozen restaurants and laid off nearly all of his 800 employees.[3] He says business is down 90 percent from usual. Local eateries are desperately trying to adapt to save their businesses. Canlis, one of Seattle’s highest-end restaurants, is now running a drive-through serving bagel sandwiches for breakfast, and burgers and veggie melts for lunch. Pandemic-related travel restrictions and supply chain disruptions have also had disastrous effects on small businesses. These unprecedented challenges, including government-mandated business shutdowns, record unemployment, and consumer uncertainty, warrant an equally unprecedented response. This blog post discusses three legal excuses for nonperformance of a contract under which small businesses may be discharged of their contractual obligations: force majeure, impracticability, and frustration of purpose.

Force Majeure

Force majeure clauses are included in contracts to spell out extraordinary circumstances under which a party’s nonperformance under a contract will be excused. Events of force majeure typically include acts of God (including natural disasters such as tsunamis, earthquakes, and floods) and acts of people such as riots, strikes, civil unrest, and wars.

The applicability of a force majeure provision is contract-specific, and there is a high bar for invocation of such a clause. In considering the applicability of force majeure, courts look to whether: (1) the event qualifies as force majeure under the contract; (2) the risk of nonperformance was foreseeable and able to be mitigated; and (3) performance is truly impossible.[4]

The court’s inquiry largely focuses on whether the event giving rise to nonperformance was specifically listed as a force majeure in the clause at issue.[5] Most force majeure clauses contain a specific list of triggering events as well as a general catch-all provision. Courts often take a “noticeably strict approach” when interpreting force majeure clauses, “requiring that the event asserted as an act of force majeure actually be listed as a qualifying event in the contract.”[6] In rare circumstances, nonperforming parties “may also rely upon a catch-all provision to argue that the occurrence of an event not explicitly listed in the force majeure clause qualifies to excuse performance.”[7] This narrow exception involves the canon of construction ejusdem generis which “limits the application of general terms which follow specific ones to matters similar in kind or classification to those specified.”[8] Thus, when a contract contains a catch-all that makes clear that it is not limited to the same type of events (e.g., “…or any other events or circumstances not within the reasonable control of the party affected, whether similar or dissimilar to any of the foregoing”), the nonperforming party’s may be excused.[9] Even if the nonperforming party can surmount this harsh requirement, it cannot invoke force majeure if performance is merely impracticable or economically difficult rather than truly impossible.[10]

The facts of a case may fall squarely within the scope of a contract’s force majeure clause; for example, if a provision specifically lists a “pandemic,” “epidemic,” “public health emergency,” or “disease” as a triggering event, COVID-19, a global pandemic, would likely qualify. However, because many contracts contain boilerplate force majeure clauses, a run-of-the-mill contract is unlikely to contain the highly specific catch-all provision required to bypass the court’s narrow interpretation. Moreover, even if a nonperforming party’s contract contains a qualifying clause, the party cannot invoke force majeure if performance is merely impracticable or economically difficult rather than truly impossible. In the present situation, although Washington-based small businesses are struggling, in most cases, their performance is not truly impossible; thus, even if a contract at issue contains a qualifying provision, the force majeure defense may not apply.

Impracticability Defense

If a contract includes a force majeure clause that allocates the risks associated with a global pandemic, that contract term controls. However, if the contract is silent on force majeure, courts may decide to excuse a nonperforming party based on the legal excuse of impracticability or frustration of purpose. These excuses may have different interpretations under applicable law, but in general, they are narrowly interpreted and applied.

There are five discernable elements in the judicial application of the impracticability doctrine: (1) there must be a supervening event (2) whose nonoccurrence was a basic assumption on which the contract was made (3) which renders contract performance impracticable (4) without fault of the party seeking relief (5) and where the party seeking relief did not bear the risk of occurrence of the event based on the contract language.[11]

In order for a supervening event to discharge a duty, the nonoccurrence of that event must have been a “basic assumption” on which both parties made the contract, meaning the supervening event must vitally affect the basis upon which the parties contracted.[12] Ordinary shifts in market conditions or financial ability are not basic assumptions and, thus, cannot be used to justify nonperformance.[13] In Washington, an intervening “prohibition or prevention by law” qualifies as an event, the nonoccurrence of which may be a basic assumption on which a contract was made.[14]

Additionally, in Washington, the phrases “impracticability of performance” and “impossibility of performance” are interchangeable.[15] The courts have held that the defense of impossibility encompasses not only objective impossibility (i.e. the thing cannot be done) but also “impracticability arising from extreme and unreasonable difficulty, expense, injury, or loss.”[16] A “subjective inability to perform” (i.e. a party’s individual inability to perform) under a contract or the fact that performance would likely be “more difficult or more expensive” does not excuse nonperformance.[17] In assessing whether cases meet the impracticability requirement, several courts have relied on the commentary in the Second Restatement, which states that “[a] severe shortage of raw materials or of supplies due to war, embargo, local crop failure, unforeseen shutdown of major sources of supply, or the like, which either causes a marked increase in cost or prevents performance altogether may bring the case within the rule.”[18] The First Restatement suggested that the loss must be “extreme and unreasonable” and, through its illustrations, indicated that tenfold increases or costs multiplied fifty times would constitute such burdens.[19]

Impracticability (or impossibility) is difficult to prove, even in light of the extreme disruptions caused by the COVID‑19 pandemic. It requires the performance to be objectively impossible, or impracticable due to extreme difficulty, expense, injury, or loss – not just financially unfavorable. Thus, if a party can render performance with additional time, energy, money, or resources, impracticability is not a valid excuse. In the current circumstances, impracticability will likely discharge a party where: (1) in a contract requiring that party’s personal performance, the party dies or is incapacitated due to a COVID-19-related illness; (2) in a contract requiring specific raw materials, the party cannot secure these materials without extreme difficulty and unreasonable expense due to severe pandemic-related shortages or shutdowns of commercial facilities in the supplying country; (3) in a contract where performance requires the continued existence of an irreplaceable good or component, that good or component is destroyed due to the pandemic; or (4) performance is rendered impossible by prohibition or prevention of law, such as in a region where there is a state-imposed lockdown.

Frustration of Purpose Defense

The doctrine of frustration of purpose discharges a party from the requirement to complete its contractual obligations when the party’s purpose for entering the contract is subsequently frustrated by a change in circumstances. Frustration of purpose requires many of the same elements as the principles of impracticability/impossibility: (1) there must be a supervening event (2) whose nonoccurrence was a basic assumption on which the contract was made (3) which substantially frustrates a party’s principal purpose (4) without fault of the party seeking relief (5) and where the party seeking relief did not bear the risk of occurrence of the event based on the contract language.[20]

Like the defense of impracticability/impossibility, the defense of frustration of purpose requires that the supervening event vitally affect a “basic assumption” upon which the parties contracted. The doctrine further requires that “the purpose that is frustrated [be] a principal purpose” of the contract such that, “as both parties understand, without it the transaction would make little sense.”[21] Moreover, “the frustration must be substantial”; it must be “severe enough that it cannot fairly be considered a risk the party assumed under the contract.”[22] Examples of “supervening frustration” illustrated by the Restatement’s authors are a cancelled event, destruction of premises, and a change in traffic regulations that reduces a tenant’s business to the point that the tenant is unable to operate except at a substantial loss.[23]

Frustration of purpose may excuse nonperformance if a contract’s purpose is frustrated by pandemic-related events. For example, if a company contracts to book a venue for an event with 150 attendees, but Gov. Inslee issues an order banning public gatherings of more than 10 people, the doctrine of frustration of purpose may apply. Thus, like impracticability, frustration of purpose may be applicable in situations where performance is rendered impossible by prohibition or prevention of law. The doctrine may also apply if a tenant’s business is affected to the point that the tenant is unable to operate except at a substantial loss.

It is important to note that the doctrines of impracticability and frustration of purpose only discharge the party’s duty to perform for so long as the impracticability or frustration exists.

Conclusion

In conclusion, as the COVID-19 pandemic continues to develop, small businesses should take proactive steps to ensure continuity of operations sufficient to meet existing contractual obligations. However, if the pandemic results in a business’s inability to satisfy its contractual obligations, it should assess the viability of the legal defenses of force majeure, impracticability, and frustration of purpose. Furthermore, while a struggling business may not be eligible to be fully discharged from its contractual obligations, it may be able to renegotiate its existing obligations using one or more these doctrines.

*       *       *

[1] Joseph Pawlak, Technomic’s Take: COVID-19, The Foodservice View (Mar. 23, 2020), https://www.technomic.com/technomics-take/coronavirus-foodservice-view.

[2] Danny Klein, What Customers Think About Restaurants and Coronavirus (March 2020), https://www.qsrmagazine.com/consumer-trends/what-customers-think-about-restaurants-and-coronavirus.

[3] Ben Casselman et al., Coronavirus Cost to Businesses and Workers: ‘It Has All Gone to Hell’ (Mar. 15, 2020), https://www.nytimes.com/2020/03/15/business/economy/coronavirus-economy-impact.html.

[4] P.J.M. Declercq, Modern Analysis of the Legal Effect of Force Majeure Clauses in Situations of Commercial Impracticability, 15 J.L. & Com. 213, 230 (1995).

[5] Allison R. Ebanks, Force Majeure: How Lessees Can Save Their Leases While the War on Fracking Rages on, 48 St. Mary’s L. J. 857, 881-82 (2017).

[6] Id. at 878.

[7] Id. at 882.

[8] Id.

[9] Id. at 881-82.

[10] Id. at 874.

[11] Restatement (Second) of Contracts § 261 (Am. Law. Inst. 1981).

[12] Id. at cmt. b.

[13] Id.

[14] 25 Wash. Prac., Contract Law and Practice §10:19 (3d. ed.).

[15] 25 Wash. Prac., Contract Law and Practice §10:16 (3d. ed.).

[16] 25 Wash. Prac., Contract Law and Practice §10:16; 1-8 Murray on Contracts § 113 (2011).

[17] Id.

[18] Restatement (Second) of Contracts § 261 cmt. d.

[19] Restatement (First) of Contracts §§ 454, 460, ills. 2 and 3 (Am. Law. Inst. 1932).

[20] Restatement (Second) of Contracts § 265 (Am. Law. Inst. 1981).

[21] Id. at cmt. a.

[22] Ebanks, supra, at 876.

[23] Restatement (Second) of Contracts § 265 cmt. a, ills. 1-4.