By Rachel D. Zaiger
Covid-19 has been dubbed a whole host of things: a global pandemic, a national health emergency, the novel coronavirus, unprecedented, Rona, the list goes on. Another phrase that has frequently been thrown into the mix? Force majeure.
At its core, the effect of a force majeure clause is to excuse performance of one party to a contract in the event an unforeseen circumstance occurs.1 Minnesota law is clear that the clause itself is determinative of the performance to be excused, and courts applying Minnesota law are reluctant to read a force majeure clause broadly.2 Clauses that explicitly cover pandemics/epidemics and acts of governmental authorities are likely triggered by covid-19 and any resulting government mandate. While some force majeure clauses may allow one party to terminate the contract after a specified amount of time wherein performance has been suspended due to the unceasing force majeure event, the majority of such clauses only provide for the temporary suspension of performance until the force majeure event is no longer a constant.
Moreover, such clauses often expressly carve out payment obligations under the contract. Stated differently, while a contractual party may have the ability to temporarily suspend performance due to a force majeure event, any payment obligations under the contract still remain intact. This can (and indeed, has) become problematic in situations where, for example, an individual is locked into a 10-year lease to operate a restaurant, the applicable governor’s mandate has rendered operating the restaurant at full capacity unfeasible, and the individual is still obliged to make full rental payments despite the substantial decline in gross revenues. Even more problematic are situations in which the applicable contract does not even contain a force majeure provision, or the provision does not extend to covid-19. In situations such as these, a party may need to turn to the defenses of impossibility/impracticability and frustration of purpose to temporarily suspend the performance of its contractual obligations or abandon its contractual obligations altogether.
Impossibility/impracticability
Under Minnesota law, the defenses of impossibility and impracticability have been used interchangeably to excuse a party’s performance of a contractual duty where: (1) due to the existence of a fact or circumstance; (2) of which the promisor at the time of making the contract neither knows nor has reason to know; (3) performance become impossible, or becomes “impracticable in the sense that performance would cast upon the promisor excessive or unreasonable burden, hardship, loss, expense or injury.”3
While there are many nuances to the defense of impossibility/impracticability, this defense has been notably recognized as suitable for circumstances in which a “prevention of law” occurs—that is, where an unforeseen act of governmental authority renders a party’s performance of a contractual duty impossible or impracticable.4 In light of Gov. Tim Walz’s numerous executive orders concerning covid-19 (imposing restrictions on essential and non-essential businesses), parties may find themselves using the defense of impossibility/impracticability more frequently.
Frustration of purpose
The defense of frustration of purpose, on the other hand, focuses on a party’s principal purpose in entering a contract, rather than a party’s ability to perform a contract. The defense of frustration of purpose excuses, in whole or in part, a party’s performance of a contractual duty where: (1) the contracting party’s principal purpose for entering into the contract has been frustrated; (2) due to no fault of the party; (3) by the occurrence of an event, the “non-occurrence of which was a basic assumption on which the contract was made.”5
Parties seeking to use this defense should pay particular attention to whether the frustration temporarily suspends the party’s contractual duty to perform or discharges the party’s performance altogether. Indeed, where a frustration is only temporary, a party’s contractual obligation is, similarly, temporarily suspended. A party’s contractual obligation is discharged only where performance of a contract would be considerably more burdensome after the frustration concludes than it would have been had no frustration occurred;6 the same applies equally to the application of impossibility/impracticability.
Key takeaway
Whether a party was (or is) justified in excusing performance under a contract, or abandoning a contract altogether, due to covid-19 may be the key issue flooding the courts in 2021. In order to protect clients now and in the future, it is best practice to ensure that any contract includes a well-drafted force majeure provision, so that the unprecedented will not also prove the party’s undoing.
RACHEL D. ZAIGER is an associate at Dady & Gardner, P.A., where she represents franchisees, dealers, and distributors throughout the United States in their relationships with franchisors, manufacturers, and suppliers.
Notes
1 See Melford Olsen Honey, Inc. v. Adee, 452 F.3d 956 (8th Cir. 2006) (applying Minnesota law).
2 See, e.g., id.
3 Powers v. Siats, 70 N.W.2d 344, 348 (Minn. 1955).
4 See, e.g., Automatic Alarm Corp. v. Ellis, 99 N.W.2d 54 (Minn. 1959); Vill. of Minnesota v. Fairbanks, Morse & Co., 31 N.W.2d 920 (Minn. 1948); Meier v. First Commercial Bank, No. A12-146, 2012 WL 3101290, at *3 (Minn. Ct. App. 7/30/2012).
5 City of Savage v. Formanek, 459 N.W.2d 173, 176 (Minn. Ct. App. 1990).
6 enXco Dec. Corp. v. N. States Power Co., 758 F.3d 940, 945 (8th Cir. 2014) (citing the Restatement (Second) of Contracts §269 and applying Minnesota law).