What Happens When the Pandemic Disrupts Your Contract and It Does Not Contain a Force Majeure Clause
Updated: Aug 10, 2020
2020 has become the year of the pandemic, and seemingly every aspect of life has been up ended with, unfortunately, no end in sight. Federal, state and local governments have implemented a variety of lockdowns, reopening plans, and issued new laws in response to an America with COVID-19. As a result of both the pandemic itself and various governments’ responses to it, parties to contracts have had their performances disrupted by a global pandemic that they likely did not anticipate.
If 2020 is the year of the pandemic, then “force majeure” is the corresponding buzzword. Much has been written and said about force majeure clauses, which excuse contractual performance if an “act of God” disrupts performance. However, not every contract is drafted with a force majeure clause. And parties to such contracts still need answers on what options they have if their contractual performance is disrupted by a global pandemic.
Texas common law has recognized common-law defenses that excuse performance under a contract, and there are two specific ones that are more likely to apply in the reality of COVID-19. These defenses include:
(1) Impossibility, impracticability or frustration of purpose;
•What: Unknown or unforeseen circumstances make performance impossible.
•Example? A landlord contracted to lease commercial space to a commercial tenant, but the local government subsequently needed to use the space as a temporary hospital for COVID-19 patients. The landlord’s ability to perform the commercial lease has become impossible.
•What: It is illegal to perform your contract.
•Example? Maybe you had a contract to perform the Friday night karaoke event at a local bar. Thanks to lockdown orders and reopening plans, that event might be illegal.
Because each of these defenses exists in Texas common law, you can assert them even when your contract does not contain a force majeure clause. As with all legal defenses, they only apply in specific circumstances. It is important to understand the law explaining these doctrines to know whether you may have a successful defense to contractual performance because of pandemic-related disruptions.
I. Impossibility, impracticability, or frustration of purpose:
Impossibility, impracticability, and frustration of purpose are three names that courts often use for the same concept, and that concept is a defense to contractual performance when such performance is rendered impossible or impracticable for a variety of reasons. See, e.g., Centex Corp. v. Dalton, 840 S.W.2d 952, 954–56 (Tex. 1992) (interchangeably referring to impossibility and impracticability as the same concept); Tractebel Energy Mktg., Inc. v. E.I. Du Pont De Nemours & Co., 118 S.W.3d 60, 64 & n.6 (Tex. App.—Houston [14th Dist.] 2003), opinion supplemented on overruling of reh’g, 118 S.W.3d 929 (Tex. App.—Houston [14th Dist.] 2003, no pet.) (discussing how Texas courts have called the defense of impracticability “under aliases” that include impossibility, impracticability, and frustration of purpose); Ramirez Co., Inc. v. Hous. Auth. of City of Houston, 777 S.W.2d 167, 173 (Tex. App.—Houston [14th Dist.] 1989, no writ).
Texas common law has recognized at least three types of impossibility defenses that are not predicated on a force majeure clause: (1) original impossibility, (2) supervening impossibility, and (3) implied condition. Each of these defenses play on similar themes but apply in different circumstances.
A. Original impossibility
A party’s performance of a contract may be excused if the contract is impossible to perform from its inception because of facts unknown to the party at the time of contracting. Solar Soccer Club v. Prince of Peace Lutheran Ch., 234 S.W.3d 814, 824 (Tex. App.—Dallas 2007, pet. denied); Castaneda v. State, 138 S.W.3d 304, 320 n.25 (Tex. Crim. App. 2003) (discussing how impossibility may exist at the time of contracting).
B. Supervening impossibility
A party’s performance under a contract may be excused if performance is rendered impossible or impracticable by supervening circumstances, which generally could not have been anticipated when the contract was made. E.g., Centex Corp. v. Dalton, 840 S.W.2d 952, 953–54 (Tex. 1992) (holding that a corporation was excused from performing under a letter agreement because federal bank regulations made performance of the contract illegal); Salter v. Jones, 348 S.W.2d 381, 383 (Tex. Civ. App.—El Paso 1961, no writ) (holding that a party’s sickness excused his contract for personal services due to impossibility of performance); Houston Ice & Brewing Co. v. Keenan, 99 Tex. 79, 88 S.W. 197, 199 (1905) (recognizing impossibility defense due to illegality).
Texas courts have recognized the defense of impossibility in three general categories: “(1) the death or incapacity of a person necessary for performance, (2) the destruction or deterioration of a thing necessary for performance, and (3) prevention by governmental regulation.” Tractebel Energy, 118 S.W.3d at 65 (citing several cases, including Nutt v. Members Mut. Ins. Co., 474 S.W.2d 575, 578 (Tex. Civ. App.—Dallas 1971, writ ref’d n.r.e.) (holding a company was not liable for failure to pay a deceased employee’s salary); Erickson v. Rocco, 433 S.W.2d 746, 751 (Tex. Civ. App.—Houston [14th Dist.] 1968, writ ref’d n.r.e.) (holding that, under the defense of impossibility of performance, homeowners were excused from maintaining insurance on property that had been burned down and had no insurable value); Centex, 840 S.W.2d at 954–56 (recognizing impossibility due to illegality)).
The defense of supervening impossibility was originally predicated on the unforeseeability of the event that made performance impossible. However, as it has evolved over the decades, the doctrine has discouraged heavy reliance on the foreseeability factor and in certain cases disregards it entirely. See Centex Corp., 840 S.W.2d at 954 (discussing how foreseeability is a factor in determining whether the impossibility defense applies but explaining that, over the decades, the “foreseeability factor has, however, gradually decreased in importance.”); Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957, 992 (5th Cir. 1976) (discussing how foreseeability may not apply to the defense of impossibility at all).
However, the availability of impossibility as a defense has its limits. Impossibility is not a defense to a party who created the impossibility with its voluntary actions. Stafford v. S. Vanity Magazine, Inc., 231 S.W.3d 530, 537 (Tex. App.—Dallas 2007, pet. denied); Solomon v. Greenblatt, 812 S.W.2d 7, 18 (Tex. App.—Dallas 1991, no writ). Further, when the obligation to perform under a contract is absolute, impossibility of performance may not apply as a defense if the impossibility could have been reasonably anticipated and guarded against in the contract. Huffines v. Swor Sand & Gravel Co., 750 S.W.2d 38, 40 (Tex. App.—Fort Worth 1988, no writ); Calvin V. Koltermann, Inc. v. Underream Piling Co., 563 S.W.2d 950, 957 (Tex. Civ. App.—San Antonio 1977, writ ref’d n.r.e.)
C. Implied condition
In contracts where a party’s performance is “contingent upon the continued existence of a state of things or set of circumstances,” a condition is implied that a disruption of such things or circumstances excuses a party’s performance. In re Doe, 917 S.W.2d 139, 142 (Tex. App.—Amarillo, 1996, writ. denied). Courts recognize that the disruption of this implied condition excuses performance if the following factors apply: “1) an unexpected contingency occurs, 2) the risk of which was not allocated either by agreement or custom, and 3) the occurrence of the contingency has made performance impossible.” Id. at 142.
For example, a contract may assume that international business travel would not be disrupted—or prohibited—by different countries’ laws as a strategy to contain a global pandemic. The ability to travel legally between two countries may be an implied condition of such a contract. With certain countries and entities, such as Canada and the European Union, currently prohibiting U.S. travelers from coming to those places, this could very well be an occurrence that makes an implied condition of the ability to internationally travel impossible to perform.
D. Economic impracticability is not a defense
Importantly, if performance of a contract has become more burdensome than anticipated, the economic burdens are not a defense to performance. See Huffines v. Swor Sand & Gravel Co., Inc., 750 S.W.2d 38, 40 (Tex. App.—Fort Worth 1988, no writ); see also Philips v. McNease, 467 S.W.3d 688, 696 (Tex. App.—Houston [14th Dist.] 2015, no pet.) (noting that husband’s performance of payment obligations were not impossible even though they may have been more economically burdensome); Valero Transmission Co. v. Mitchell Energy Corp., 743 S.W.2d 658, 663 (Tex. App.—Houston [1st Dist.] 1987, no writ). This distinction is important to note as companies grapple with the economic fallout of a global pandemic.
Illegality as a defense is fairly straightforward—it means that performance of a contract is illegal. An illegal contract is void and may not be enforced. See Denson v. Dallas Cty. Credit Un., 262 S.W.3d 846, 852 (Tex. App.—Dallas 2008, no pet.); Indian Oil Co., LLC v. Bishop Petroleum Inc., 406 S.W.3d 644, 649 (Tex. App.—Houston [14th Dist.] 2013, pet. denied).
There is necessarily some overlap between the defenses of illegality and impossibility since one of the reasons a contract may become impossible to perform may be because of a governmental regulation prohibiting the performance. However, illegality is recognized as a separate and independent defense to contractual performance. Further, the effect of succeeding on an illegality defense renders a contract, or at least the illegal obligations, void; this is distinct from the defense of impossibility, which merely excuses performance.
Contracts may be considered illegal if parties to them either (1) promise to perform an act that is forbidden by law where the act will occur or (2) create a contract with an intent to violate foreign law even if the contract does not violate local law or the law where the contract is made. Ralston Purina Co. v. McKendrick, 850 S.W.2d 629, 638–39 (Tex. App.—San Antonio 1993, writ denied); Miller v. Long-Bell Lumber Co., 148 Tex. 160, 163, 222 S.W.2d 244, 246 (1949); Franklin v. Jackson, 847 S.W.2d 306, 309 (Tex. App.—El Paso 1992, writ denied).
COVID-19 has wreaked havoc on the world as we know it. This has necessarily led to a massive increase in disruptions to contracts that did not anticipate what the year 2020 held in store. As businesses grapple with potential liability because of failure to perform contractual obligations, impossibility and illegality may provide some recourse to those who find themselves unable to honor their contracts in a pandemic.
By: Anna E. Fredrickson