April 27, 2020
As the novel coronavirus has and continues to wreak havoc on so many lives, so does it affect contracts, whether they be those between landlord and tenant, buyer and seller, or otherwise. As addressed by my esteemed colleague David Pokela, for North Carolina, we here in South Carolina find ourselves in uncharted waters. As we slowly recover, riveting issues loom: there will be instances in which a party does not or cannot perform as a result of this ravaging virus, and when that occurs, litigation is almost certain to follow. Conference rooms and courtrooms are likely to hear months, even years of discussion concerning force majeure clauses, the doctrine of impossibility and the doctrine of frustration of purpose.
First, force majeure. Most practitioners have seen or even drafted such provisions. Indeed, most people have probably noticed a paragraph under that title in some contract into which they have entered. What does it mean and what does it do? Force majeure is defined as a superior or irresistible force or an event or effect that cannot be reasonably anticipated or controlled. Generally, in circumstances that render one’s contractual performance impossible, force majeure serves to excuse, or occasionally, modify the required performance.
Like our neighbor North Carolina, force majeure occupies an extremely slight role in South Carolina jurisprudence; there is little authority to guide us now that we find ourselves in the midst of a pandemic certain to affect scores of contracts. There is no specific guidance as to whether South Carolina’s courts will liberally construe force majeure clauses in light of COVID-19, or whether the construction of such provisions will meet with stricter interpretation. Following the analysis set forth by my colleague, we can, with some assurance, anticipate the following considerations:
The exact language of force majeure clauses will be carefully examined by our courts. With anything similar to this pandemic having occurred long ago when our legal system and indeed our society was much different, we have no guidelines for what we now face. We do know, however, that South Carolina has generally allowed parties to define the terms of their contracts. A court must enforce an unambiguous contract according to its terms “regardless of its wisdom or folly, apparent unreasonableness, or the parties’ failure to guard their rights carefully.” See Ellis v. Taylor, 449 S.E.2d 487 (1994). This has long been our State’s mantra. While a plethora of force majeure provisions refer to Acts of God, war, terrorism, fire, earthquake, and yet others include strikes, labor shortages or acts of government, this author posits that those specifically referencing global pandemics are rare. Thus, effectively fighting the breach of contract battle may fall on exactly the language included in the force majeure provision. As to selected contracts, one may be able to rely upon an act of government excuse from performance if a business has been shuttered due to a state of emergency. Even in those circumstances, however, some clauses specifically exclude financial hardship as an excuse from performance, even if the uncontrollable act causes that hardship.
Timely notice of a contracting party’s reliance on force majeure will probably be a key consideration. So, too, will be an analysis of whether the pandemic actually caused the inability of a party to perform under the terms of a contract. For example, the determination of whether performance is excused could fall on whether a business was deemed essential or non-essential under a state of emergency.
While the contract battles amid this pandemic have already begun, and will persist, practitioners should use this crisis as a learning opportunity; perhaps the next force majeure clause you draft should include pandemics, even mentioning viral and/or bacterial attacks.
Doctrine of Impossibility
Next, the doctrine of impossibility of performance has often been characterized as an equitable gap filler – a guess as to what the parties might have included in a contract had they considered the contingency at hand. Historically, our courts have excused performance when “rendered impossible by the act of God, the law, or the other party.” Pearce-Young-Angel Co. v. Charles R. Allen, Inc., 50 S.E.2d 698 (1948). However, “[a] party to a contract cannot be excused from performance on the theory of impossibility of performance unless it is made to appear that the thing to be done cannot by any means be accomplished, for if it is only improbable or out of the power of the obligor, it is not deemed in law impossible.” Hawkins v. Greenwood Dev. Corp. 493 S.E.2d 875 (Ct. App. 1997). The party asserting impossibility of performance as a defense bears the burden of proof. Id. Consistent with South Carolina’s strict construction of contract language, our court has, on at least one occasion, rejected the argument that the doctrine has been extended to situations wherein the anticipated performance is not merely physically impossible, but so impracticable as to significantly alter the parties’ understanding as to the nature of the subject contract. See MPI South Carolina-1, LLC v. Levy Center, LLC, et al., 2011 WL 11733080 (Ct. App. 2011).
Frustration of Purpose Doctrine
Finally, the consequences of COVID-19 will certainly result in litigation wherein parties seek to be excused from contractual obligations pursuant to the frustration of purpose doctrine. Again, we do not know the lens through which our courts will evaluate hardships resulting from this global crisis, but South Carolina has previously found this doctrine to apply only if the purpose that was frustrated was a principal purpose of that party in making the contract. Additionally, the frustration must be substantial and the non-occurrence of the frustrating event must have been a basic assumption upon which the parties entered the contract. In other words, our courts are conditioned to follow well-established principles that parties should condition performance and thereby assign risks at the time they enter into their contract. South Carolina’s courts may be inclined to reject the notion it should correct the parties’ mistake by applying presumed conditions into an agreement by using the doctrine of frustration of purpose. Id.
The novel coronavirus presents us with much uncertainty, including questions of how courts will interpret force majeure clauses and other defenses to contract performance. There is little to guide parties or their counsel except careful consideration of a jurisdiction’s historical attitude toward occurrences not within a parties’ control, or those that genuinely render performance an impossibility. A safe first step in these oncoming battles is to first turn to the language of the contract.
 Interestingly, another of my partners, Justin Hoyle, included pandemic in a force majeure clause he drafted well before we were introduced to COVID-19.
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