In law there are some very limited situations where the parties are excused from performing their obligations under a contract.
A contract is a legal agreement between two or more people, also called parties. One party promises to do something and the other party promises to do something in return. To be a contract, there must be something of value (also called consideration) exchanged.
Most people enter into contracts on a daily basis. They can be created by something as simple as ordering food or filling up your gas tank. Other examples of contracts are purchasing tickets for an event, booking a venue for a wedding, having renovations done on your house or booking a holiday. Covid-19 may have changed the situation entirely. The activity may now be prohibited by law or look very different than either party anticipated.
Some contracts have terms that deal with serious unforeseen circumstances. Sometimes the contract states what is a serious event. Things like governments declaring a state of emergency, closed borders or epidemics may be listed. Even if they are not listed, general wording in a force majeure clause could cover something like a global pandemic.
It is not enough that there is a serious unforeseen circumstance. The circumstances must affect a party’s ability to perform the contract. The contract might say parties are excused from the contract if the circumstances prevent them from performing. It might say they are excused even if it only delays them from performing. If the contract does not say what impact there must be generally the circumstances must make the contract essentially impossible to perform. The fact that the circumstances make it more expensive or less profitable to perform the contract will generally not be enough.
The circumstances must also be the reason that the contract cannot be performed. For example, if the contract depends on employees being able to work, whether they could work remotely would be considered.
If there are circumstances that meet these requirements the terms of the contract will set out what will happen. Your contract may say that parties do not have to live up to their obligations as long as the circumstances continue. It may say that if the circumstances continue for longer than a few weeks or months the contract is ended.
Even if a contract doesn’t include a force majeure clause, parties may not need to fulfill their obligations under the contract. If unforeseen circumstances make performance of the contract very different or impossible, the contract could simply end. The circumstances must not be the fault of one of the parties, or under their control. It must also be a circumstance that the parties did not consider when the contract was created.
The Covid-19 pandemic would likely be considered an unforeseen circumstance if the contract was signed before the pandemic started. It could make performance impossible, for example, because the type of travel or size of gathering is now not allowed. It could also make performance very different. Social-distancing rules could make it hard to have people in your house doing renovations and also change how the workers can work together. But things like a contract taking longer or being more expensive are usually not enough to frustrate a contract. For frustration to apply the whole reason for the contract must no longer exist.
If a contract is frustrated or becomes impossible, neither party is obligated to perform their obligations. What this means can differ depending on what has already happened under the contract. The law provides that even when a contract is frustrated or impossible to perform, a party who has already done some of the work under the contract must still be paid for that work. A venue that takes a down payment on a wedding may claim that they have spent that down payment preparing the venue. Similarly, work done by an event planner before the event was cancelled may also need to be paid for.
This area of the law can be very complex and may depend on the exact terms of your contract. Courts have not always agreed on when a contract is frustrated. In one case a contract was considered frustrated because the land being purchased could not be developed as planned by the purchaser. In a different case, a contract to buy land with the intention of demolishing the existing building was found to not be frustrated even though the government ordered that the building be preserved.
You should seek legal advice from a lawyer before you decide what to do about your contract.
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