May a Contract Be Forgiven if it Becomes Impossible or Impracticable to Perform During COVID 19?

Introduction

In the current climate, when businesses are shutting down and economy has come to a staggering halt, many business owners are left wondering whether they are obligated to adhere to contracts they signed in good times. In an uplifting display of collective solidarity against an invisible enemy, many obligees (persons to whom another is obligated) are making concessions by entering into deferment agreements with the obligors (persons who are bound to another) to delay performance until the pandemic subsides and the resultant shelter-in-place orders are either modified or lifted. Some are not. Obligees who refuse to provide concessions may have their own obligations that are not being deferred. That being said, a person bound by a contract cannot simply stop performing without being liable for damages, unless it becomes impossible or impracticable to perform.

When Performance Under a Contract May Not be Excused?

May your obligation under a contract be extinguished (forgiven) if it becomes more expensive or more difficult to perform? The answer likely depends on the degree of impossibility or impracticability required for one to avoid liability for breach and is likely to be decided on a case-by-case basis. Normally, a party may not escape a contractual obligation merely because performance would be more expensive or more difficult than contemplated (Butler v. Nepple (1960) 54 Cal. 2d 589, 599; Kennedy v. Reece (1964) 225 Cal. App. 2d 717, 725). If performance of a contract is possible, nonperformance can result in a breach. If what is agreed to be done is possible and lawful, it must be done. Otherwise, the nonperforming party must pay damages, even if the performance was rendered impracticable or even impossible by an unforeseen cause over which the party had no control (Kennedy v. Reece (1964) 225 Cal. App. 2d 717, 725).

When Performance May Be Excused?

When the nonperformance is due to excessive and unreasonable difficulty or expense the defense of impossibility may apply (Mineral Park Land Co. v. Howard (1916) 172 Cal. 289, 293; Christin v. Superior Court (1937) 9 Cal. 2d 526, 533) The operative word, in this context, seems to be “excessive.” A party invoking the impossibility defense must show that reasonable efforts were used to surmount the obstacles that prevented performance (McCalden v. California Library Ass’n (9th Cir. 1990) 955 F.2d 1214, 1219, cert. denied, 504 U.S. 957 (1992)).

Performance may also be excused if the passage of a statute or ordinance, such as the shelter-in-place and social distancing orders, makes the contemplated performance illegal. (Civ. Code § 1511(1); Webster v. Southern Cal. First National Bank (1977) 68 Cal. App. 3d 407, 415–416). An action for breach of contract does not lie when its performance is prevented by operation of law. (Civ. Code, §. 1511; National Pavements Corp. v. Hutchinson Co. (1933) 132 Cal. App. 235, 238.) As an example, if you run a day care and are unable to provide services as a result of the enactment of the shelter-in-place orders, you are not in breach. The question becomes, can or should such a business, continue to lawfully charge fees for services it cannot provide? The answer is - probably not.

However, laws that merely make performance unprofitable or more difficult or expensive also do not excuse the duty to perform a contractual obligation (Lloyd v. Murphy (1944) 25 Cal. 2d 48, 55).

Conclusion

Like everything else in law, where there are no bright-line rules, the question of whether performance is excused will depend on a myriad of factors, including, whether the shelter-in-place orders made it impossible, impracticable or illegal on the one hand, or merely inconvenient, difficult or more expensive on the other hand to perform under a contract. In the former case, the defense of impossibility will most likely prevail. In the latter case, it will likely depend on the degree of difficulty or expense.