Joseph G. Ballstaedt
801.365.1021
joe@snjlegal.com
This is a unique and disconcerting time. Challenges arising from the COVID-19 have created incredible uncertainty for society’s physical, emotional, and economic health. As this pandemic pushes on with no clear end in sight, many individual’s wonder if they’ll have a job much longer and if they’ll be able to pay their bills. Similarly, businesses may be holding on for dear life. Sources of revenue may be slashed or eliminated, and many businesses’ and individuals’ ability to fulfill contractual obligations may be severely limited—if not made impossible.
What if a pandemic, natural disaster, or other unforeseen event makes performing a contract impossible, impracticable, or pointless? Is somebody still on the hook for money owed under the contract? Do both parties still need to perform the contract obligations? Maybe. Maybe not.
This post discusses when unforeseen, supernatural, or destructive events may free parties from their contractual obligations under Utah law. It specifically discusses the contract principles of force majeure, impossibility (also referred to as impracticability), and frustration of purpose.
Force Majeure
“Force majeure” is a French term that means “superior force.” In the legal context, parties often insert a force majeure clause into contracts that explains when the parties will be freed from fulfilling their contract obligations due to a “superior force” beyond the parties’ control. These forces are generally extraordinary events or circumstances such as war, strike, riot, crime, plague, or a natural disaster. Natural disasters are often referred to as acts of God and include hurricanes, floods, earthquakes, tornados, volcanic eruptions, etc. The force majeure clause may also reference acts of government or other similar events. Generally, the triggering event for a force majeure clause must be unforeseeable and directly inhibit performance or make performance impossible.
Parties are free to negotiate the terms of the force majeure clause, and whether an event frees the parties from performing the contract depends on the specific language of this clause, if such a clause exists at all. For example, a contract may define force majeure under its normal and expected meaning, but other times, certain events may be excluded. For instance, in an area where floods are common, the force majeure clause may say that floods don’t trigger this clause. Perhaps a force majeure clause explains that performance is only excused or delayed during the force majeure, but once it ends, the parties both have to perform the contract. Or perhaps performance will only be partially excused to the extent that the force majeure prevents the parties from performing some part of the contract.
But even when a contract has no force majeure clause, performance may be excused under basic principles of contract law that apply to all contracts, even if not stated in writing. A couple of these principles are explained next.
Impossibility or Impracticability
In Utah, “impossibility or impracticability” is a defense to fulfilling a party’s contract duties. This defense is similar to force majeure, but it exists in every contract, even if not specifically stated, unlike force majeure clauses. The defense of impossibility is triggered and may likely free a party from a contract obligation if: 1) an unforeseen event occurs after the parties formed the contract, 2) that event is not the fault of the non-performing party, and 3) the event makes performance impossible or highly impracticable.
The reasoning behind this defense is that the contract is based on certain assumptions that form the basis of the agreement, and it would be unfair to force performance of this agreement or hold a party responsible if performance would be impossible or impracticable.
Depending on the circumstances of the contract, examples of impossibility or impracticability may include death of a necessary party, destruction of essential property, unforeseen changes in law, acts of God (generally natural disasters), or other circumstances that make it impossible or impracticable to perform or receive the essential benefits of the contract.
Again, these events must be unforeseeable and not reasonably within the contemplation of the parties. A party probably isn’t excused for impracticability or impossibility if it knew about a pending or possible event when it entered the contract. If a party since a contract and takes on the risk of such an event that will make performance impossible or impracticable, it cannot later claim it is freed from performing due to impossibility or impracticability. For instance, if there are hurricane warning when the contract is signed, a party must bear the consequences of the hurricane. And if a pandemic is sweeping across the country, it must bear any damages the pandemic brings. Also, inability to pay a contract price usually does not trigger this defense.
Frustration of Purpose
Like impossibility or impracticability, another contract defense to performance that exists in all contracts in Utah—regardless of whether it is stated in the written contract—is “frustration of purpose.” Although similar to the contract defense of impossibility, frustration of purpose is different in that performing the contract promise is “pointless,” even though it may be possible to perform. Utah courts have explained that whether this doctrine applies “depends on the total or nearly total destruction of the purpose for which, in the contemplation of both parties, the transaction was made.” The party cannot be at fault for this triggering occurrence; rather, the occurrence must be beyond the parties’ reasonable expectations and control. Like the defense of impossibility, the triggering event must destroy the basis assumptions and expectations of the contract.
For example, if a party leases land to develop for a specific purpose, but then this purpose is thwarted by something like an inability to obtain city approval, it would be possible to pay the monthly lease, but it would also be pointless to do so without being able to also develop the land. Similarly, if a party rented out a venue—say for a wedding or concert—but due to an epidemic or an act of God, the venue cannot be used, it would be pointless to pay for use of the venue, although certainly possible. Under Utah law, when these and other similar circumstances occur, the obligation to pay or otherwise perform may be excused because the essential purposes of the contract (and the payment) is frustrated. Performing the contract (usually by paying the contract amount) would be pointless.
On the other hand, it usually isn’t enough under Utah law that a party no longer has the ability to pay a contract amount, so that party probably isn’t freed from performing. If economic hardship triggered the doctrine of frustration of purpose, most people could get out of almost any contract, and few people could be held accountable for overcommitting themselves financially. In such circumstances, the contract likely is not “pointless” even if extremely difficult to perform. For instance, if a company leases a space to house employees, but for whatever reason those employees quit, the company may be in a frustrating situation where it has to pay for rented space for its employees without the ability to generate revenue from those employees. Yet, these circumstances probably don’t trigger the doctrine of frustration of purpose. The purposes of the lease agreement—to provide the business owner a place to conduct business and to fulfill the landlord’s need for a tenant—still exist and are not obliterated. The contract is not pointless.
Each circumstance is unique, however, and it is wise to talk with an attorney and receive an opinion that takes into account each case’s facts.
Assistance with Contract Obligations Following Unforeseen Circumstances
This article discusses the basics principles of three defenses to a party’s duty to fulfill a contract when unexpected and extraordinary situations arise, but it does not discuss these three defenses in depth or account for the unique circumstances you or your company may be experiencing. If you or your company is facing difficult contract obligations due to circumstances out of your control, or if a company or person is attempting to avoid contract obligations for allegedly unforeseen circumstances, I am happy to discuss. I offer a free consultation. My direct dial is 801-365-1021, and you can e-mail me at joe@snjlegal.com. I look forward to hearing from you.
