Can COVID-19 get you out of a contract?

You are required to perform your contractual obligations, otherwise you will have breached the contract. If you breach a contract, the other party to the contract may bring a claim against you for any loss they experienced as a result of the breach. However, there are some circumstances where you are not required to perform your obligations under the contract.

Force Majeure
Many contracts include a “force majeure” clause (aka “acts of God” clause) that excuses the parties where extraordinary events prevent them from carrying out some or all of the contract. If your contract has a force majeure clause, it will define what constitutes a force majeure event. It may or may not refer to epidemics and diseases; if not, check whether it includes a catch-all phrase like “any other event or occurrence beyond the reasonable control of the applicable party”.

The party trying to rely on a force majeure clause should be able to demonstrate that (1) a force majeure event has occurred (check the wording of the contract); and (2) the force majeure event actually caused the non-performance (or delay) of the contract.

Significantly higher costs are not typically enough to constitute a force majeure event. Suppose that your main supplier operates in Wuhan, China (the origin place of COVID-19 which was subsequently locked-down by the Chinese government). Your supplier should be able to rely on the force majeure clause in their contract to supply you with goods, but if there are alternate sources for you to obtain the same goods you may not be able to rely on any force majeure clause in the contracts you have with your customers.

International contracts should also state the law governing the contract. This is very important, as the law regarding force majeure varies greatly from country to country.

If the contract in question does not contain a force majeure clause, you might still be able to rely on the legal doctrine of frustration. In general terms, it applies when (1) there is an unforseeable supervening event that occurs through no fault of either party; (2) the situation is not addressed by a force majeure clause or other provision in the contract; and (3) the event renders performance of the contract impossible or has undermined the purposes for which the parties entered the contract.

Like a force majeure situation, the party alleging frustration needs to demonstrate that the above conditions are met. In determining whether a contract has been frustrated, the court will consider what is reasonable in the circumstances and whether requiring performance would fundamentally change the agreement. In most cases, it will be difficult to establish that COVID-19 has resulted in a force majeure event or frustration.