Associate Wajiha Rais COVID-19 Publication: Legal Distancing - Avoiding Contractual Performance Due To COVID-19 Impacts
» Posted July 15, 2020 Publications
Originally published in Legal Distancing: Avoiding Contractual Performance Due to COVID-19 Impacts, American Bar Association Forum on Construction Law Division 13 (Government Construction) Newsletter, Volume 5, Issue 2, Summer 2020
The novel coronavirus and the disease it causes (COVID-19) not only pose a significant health risk to society but have also disrupted business operations around the world. After quickly being declared a global pandemic, governments around the world restricted travel and forbade non-essential businesses from operating. At one point, most of the U.S. population, with the exception of essential workers, was subject to stay-at-home orders. Desperate measures flowing from a policy to contain the deadly virus have also led to severe disruptions in business supply chains, causing delays and increased costs of doing business. While certain industries have suffered, others have weathered the storm. For instance, certain construction work, such as roadwork, saw an uptick as State governments took advantage of empty roads to push existing projects to completion and enter into new roadwork agreements at an accelerated pace. And yet, the resulting influx of roadwork projects has harmed some contractors who suddenly experienced a fall in labor supply and an accompanying surge in labor cost as their standard labor pools migrated to those highway projects.
Unsurprisingly, many contractors are wondering whether they may be entitled to relief from contractual performance under these exacting circumstances. Contractors may find relief in force majeure and equivalent clauses in their contract and, in the absence of such clauses, in the common law defenses of impossibility of performance or frustration of purpose.
Force Majeure and Equivalent Clauses
A contract may contain a force majeure clause that describes the parties’ rights and obligations in the event of a significant occurrence such as the COVID-19 pandemic. Therefore, contractors should first review their contract for force majeure or equivalent clauses. While “force majeure” is typically a term used for commercial contracts, other contracts may employ similar provisions such as “suspension,” “emergency,” or “delay” clauses.
Federal contractors may find relief in relevant sections of the Federal Acquisition Regulation (“FAR”), such as FAR 52.249-10 and FAR 52.249-14. These sections of the FAR, in effect, are equivalent to a force majeure clause because they excuse nonperformance in the event of a significant unforeseeable event.
- FAR 52.249-10
FAR 52.249-10 covers default by a contractor in fixed-price construction contracts. Normally, a contractor that fails to timely perform is considered to have defaulted and the federal government may, in response, terminate the contractor’s right to proceed with the work or claim damages. Under FAR 52.249-10(b), a contractor’s right to work will not be suspended and nor will the contractor be liable for damages if the delay in performance “arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor.” FAR 52.249-10(b) goes on to list examples of such causes and those most relevant to the present COVID-19 impacts include “acts of God,” “acts of the Government in either its sovereign or contractual capacity,” “epidemics,” “quarantine restrictions,” and “freight embargoes.” “Epidemic” is clearly the most applicable to the COVID-19 pandemic but others listed may also be equally relevant depending on the specific delays experienced by the contractor.
Contractors should note, however, that the mere existence of the COVID-19 “epidemic” is not enough to excuse a failure to perform. The language of FAR 52.249-10(b) makes clear that a Contractor must show a causal connection between COVID-19 and the contractor’s nonperformance.
Normally, a subcontractor’s or supplier’s failure to perform does not excuse a default by the prime contractor. However, under FAR 52.249-10(b), the prime contractor will not be in default if the Subcontractor’s or supplier’s failure to perform itself arose from “unforeseeable causes beyond the control of and without the fault or negligence of both the Contractor and the subcontractors or suppliers.” COVID-19 impacts could constitute “unforeseeable causes beyond the control” of the prime contractor and its subcontractor or supplier. Again, the contractor would need to demonstrate a causal connection between the pandemic and the subcontractor’s delay or other failure to perform.
Additionally, FAR 52.249-10(b) requires that contractors notify the Contracting Officer in writing within ten days from the beginning of any delay. Failure to give timely notice may bar a contractor from seeking relief for nonperformance under FAR 52.249-10.
- FAR 52.249-14
Federal contractors may also find relief in FAR 52.249-14(a), which is substantively analogous to FAR 52.249-10(b) but applies to cost-reimbursement contracts instead of fixed-price contracts.
FAR 52.249-14(a) excuses a contractor if the failure to perform was due to “causes beyond the control and without the fault or negligence of the Contractor.” FAR 52.249-14(a) goes on to list examples of such causes and although the list is not identical to the list in FAR 52.249-10, it includes all of the same causes mentioned above that are relevant to the COVID-19 pandemic. Just like FAR 52.249-10, a contractor must show a causal connection between COVID-19 impacts and the nonperformance in order to successfully avail itself of the relief granted in FAR 52.249-14(a).
A prime contractor is also excused for default resulting from a subcontractor’s poor performance, under this section of the regulations, if the subcontractor’s failure to perform “was beyond the control of both the Contractor and Subcontractor, and without the fault or negligence of either.” Again, the contractor would need to demonstrate a causal connection between the pandemic and the subcontractor’s delay or other failure to perform. However, relief would not be available if subcontracted supplies or services were available from other sources, the Contracting Officer ordered their purchase in writing, and the Contractor failed to comply with the order.
Common Law Defenses
Contractors may find that their contract does not include a force majeure or equivalent clause. In such an event, contractors may still seek relief through the common law defenses of impossibility of performance or frustration of purpose.
- The Impossibility Defense
The impossibility defense, if successful, excuses a party from performing its obligations under the contract. To establish this defense, a contractor must show: (1) the unexpected occurrence of an intervening act; (2) such occurrence was of such a character that its non-occurrence was a basic assumption of the agreement of the parties; and (3) that occurrence made performance impracticable. Generally, courts have expanded the impossibility defense over the years from requiring literal and scientific impossibility to a more relaxed standard of impracticability that is synonymous with the impracticability defense under the Uniform Commercial Code. Although an increase in the cost or difficulty of performance, generally, will not render performance impossible or impracticable, an excessive or unreasonable increase might.
COVID-19 and its accompanying impacts could be construed as an intervening act. Assuming that the non-occurrence of COVID-19 impacts was a basic assumption of the construction contract, a contractor may avail itself of the impossibility defense if COVID-19 rendered its performance literally impossible or even impracticable. This could be because of, for example, the unavailability of materials, government regulations requiring the closure of job sites, or regulations prohibiting the gathering of workers, among other reasons. A contractor may also avail itself of the impossibility defense if it suffered an increase in the cost or difficulty of performance due to COVID-19 impacts, but only if the increase was excessive or unreasonable.
An unexpected intervening event, the non-occurrence of which was a basic assumption of the contract, may render performance either permanently or temporarily impossible. If COVID-19 impacts render performance permanently impossible, a contractor can seek to be permanently discharged from its duties under the contract. However, to the extent that COVID-19 impacts render performance only temporarily impossible, a contractor may only suspend performance until such time as the COVID-19 impacts subside. The contractor will not be discharged entirely from its duty to perform unless delayed performance will be materially more burdensome.
- Frustration of Purpose
Frustration of purpose is an equitable defense at common law that is similar to the impossibility defense. Both defenses, if successfully asserted, will excuse a party from performing under the contract. To establish the defense of frustration of purpose, a contractor must show the following: (1) the contractor’s principal purpose in making the contract is substantially frustrated; (2) without the contractor’s fault; (3) by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made. The “principal purpose” of a contract is a purpose that is “so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense.”
Unlike the impossibility defense, here, a party may still perform but its performance is rendered worthless and would no longer give the other party what first induced it to enter into the agreement. Similar to the impossibility defense, however, the mere fact that performance has become more economically burdensome, or even unprofitable, is not enough to establish frustration of purpose.
A contractor may find that a principal purpose of its contract is substantially frustrated due to COVID-19 impacts, and not due to any fault of the contractor. If the non-occurrence of the COVID-19 impacts were a basic assumption of the contract, a contractor may be able to assert the frustration of purpose defense and avoid its obligations under the contract. In order to avail itself of this defense, however, the contractor must show more than a mere decline in profitability. Frustration of purpose is a difficult defense to establish but one that some contractors may find is applicable to their circumstances during the COVID-19 pandemic.
The COVID-19 pandemic highlights the benefits to contractors from a strong force majeure or equivalent contractual provision, which attempts to eliminate uncertainty by laying out the rights and duties of the parties in the event of an unexpected occurrence. Federal construction contractors may find relief in FAR 52.249-10 and 52.249-14, to the extent they can show a causal connection between delayed performance and the COVID-19 pandemic.
Meanwhile, contractors whose agreements are silent as to this issue may still find relief in the common law defenses of impossibility of performance or frustration of purpose. To the extent COVID-19 impacts are only temporary, the impossibility defense, if available, will allow a contractor to suspend performance until the impacts subside. However, in the extreme circumstance in which delayed performance would be materially more burdensome, a contractor may permanently avoid performance under the contract. The frustration of purpose defense, if available, may also allow a contractor to avoid performance but, like the impossibility defense, a contractor would have to show more than a mere decline in profitability.
 FAR 52.249-10(a).
 FAR 52.249-14(b).
 See United States v. Winstar Corp., 518 U.S. 839, 904 (1996) (citing Restatement (Second) of Contracts § 261); Opera Co. of Bos. v. Wolf Trap Found. for Performing Arts, 817 F.2d 1094, 1102 (4th Cir. 1987).
 See Thrifty Rent-A-Car Sys., Inc. v. S. Fla. Transp., Inc., No. 04-CV-0751-CVE-SAJ, 2005 WL 8175935, at *3 (N.D. Okla. Oct. 26, 2005) (“The original, ‘harsh common law rule’ of impossibility … which typically denied relief to those found in breach due to supervening circumstances, has yielded to the modern manifestation of the doctrine, which reflects a more forgiving ‘impracticability’ standard, as embodied in the Restatement (Second) of Contracts, § 261”); Opera Co. of Bos., 817 F.2d at 1099 (“[I]n line with the tendency of the law ... towards an enlargement, modern authorities also abandoned any absolute definition of impossibility and, following the example of the Uniform Commercial Code, have adopted impracticability or commercial impracticability as synonymous with impossibility in the application of the doctrine of impossibility of performance as an excuse for breach of contract” (internal quotations omitted)).
 See Restatement (Second) of Contracts § 261, cmt. b.; Jennie-O Foods, Inc. v. United States, 580 F.2d 400, 409 (Ct. Cl. 1978) (stating that the impossibility/impracticability defense is applied conservatively and “is not invoked merely because costs have become more expensive than originally contemplated”); In re Westinghouse Elec. Corp. Uranium Contracts Litig., 517 F. Supp. 440, 453 (E.D. Va. 1981) (“Promisors seeking to establish impracticability by reason of increased expense have not generally found a sympathetic ear in court.”).
 See Restatement (Second) of Contracts § 261, cmt. d.; W.R. Grace & Co. v. Local Union 759, Int’l Union of United Rubber, Cork, Linoleum & Plastic Workers of Am., 461 U.S. 757, 768 n. 12 (1983) (“[I]ncreased cost of performance does not constitute impossibility.”); Habitat Tr. for Wildlife, Inc. v. City of Rancho Cucamonga, 175 Cal. App. 4th 1306, 1336 (2009) (“[A] thing is impracticable when it can only be done at an excessive and unreasonable cost.”); Jennie-O Foods, 580 F.2d at 409; Westinghouse Elec. Corp. Uranium Contracts Litig., 517 F. Supp. at 453 (stating that suffering a loss on a portion of the agreement is not enough to render performance on the entire contract impracticable; a party must, instead, show a net loss on the whole agreement).
 See Restatement (Second) of Contracts § 269; G. W. Andersen Constr. Co. v. Mars Sales, 164 Cal. App. 3d 326, 335 (1985); Long Signature Homes, Inc. v. Fairfield Woods, Inc., 248 Va. 95, 98 (Va. 1994).
 Supra n.8 and authorities cited therein.
 Restatement (Second) of Contracts § 265; Pieper, Inc. v. Land O’Lakes Farmland Feed, LLC, 390 F.3d 1062, 1065 (8th Cir. 2004); Rembrandt Enters., Inc. v. Dahmes Stainless, Inc., No. C15-4248-LTS, 2017 WL 3929308, at *6-7 (N.D. Iowa Sept. 7, 2017); Gen. Elec. Capital Corp. v. Charleston, No. CIV. A. 88-6132, 1989 WL 63213, at *3 (E.D. Pa. June 12, 1989), aff’d, 898 F.2d 140 (3d Cir. 1990); Habitat Tr. for Wildlife, 175 Cal. App. 4th at 1336.
 Rembrandt Enters., Inc., 2017 WL 3929308 at *6 (quoting Restatement (Second) of Contracts § 265 cmt. a); see also Pieper, Inc., 390 F.3d at 1065.
 Hemlock Semiconductor Operations, LLC v. SolarWorld Indus. Sachsen GmbH, 867 F.3d 692, 704 (6th Cir. 2017) (“The frustration-of-purpose defense also requires that the unforeseen event thwart the parties purpose in making the contract to such a degree that one party’s performance [becomes] virtually worthless to the other”) (internal quotations omitted); Aukema v. Chesapeake Appalachia, LLC, 904 F. Supp. 2d 199, 211 (N.D.N.Y. 2012).
 United States v. Sw. Elec. Co-op., Inc., 869 F.2d 310, 316 (7th Cir. 1989) (“[T]he fact that the performance became economically burdensome [i]s not sufficient to excuse performance”) (citing United States v. Great Plains Gasification Assocs., 819 F.2d 831 (8th Cir.1987) and Langham–Hills Petroleum, Inc. v. Southern Fuels Co., 813 F.2d 1327 (4th Cir.1987)); see also Hemlock Semiconductor Operations, 867 F.3d at 704 (“[T]he frustration-of-purpose defense generally cannot be based on an argument that the continuation of existing market conditions was a ‘basic assumption’ on which the contract was made … [a]nd courts usually will not assume that ‘mutual profitability’ was the primary purpose of a contract.”); Gen. Elec. Capital Corp., 1989 WL 63213 at *3 (“[I]t is not enough that the transaction has become less profitable for the affected party or even that he will sustain a loss”).
 Supra n.13 and authorities cited therein.