April 13, 2020

Defenses to Breach of Contract Claims Arising From COVID-19 Business Disruptions in Pennsylvania

There is no question that, in addition to creating an unprecedented health crisis, the COVID-19 pandemic has severely disrupted commerce in the United States and globally. In Pennsylvania, Governor Tom Wolf ordered all businesses other than those that are “life-sustaining” to cease operations at their physical locations and issued a statewide “stay at home” order effective through at least April 30, 2020.

The resulting curtailment of economic activity will make it difficult, if not impossible, for many Pennsylvania businesses to perform their obligations under existing contracts. This article summarizes several defenses businesses may have under Pennsylvania law to breach of contract claims arising from COVID-19-related business interruptions, including force majeure, impossibility or impracticability, frustration of purpose, and illegality.

Force Majeure Clauses

“A force majeure clause lists a series of events . . . which the parties to a contract have agreed upon as excuses for nonperformance.” Kaplan v. Cablevision of PA, Inc., 448 Pa. Super. 306, 316 (1996) (quoting John Edward Murray, Jr., Murray on Contracts 639 (1990)). In interpreting a force majeure clause, Pennsylvania courts will examine the events listed in the clause using normally applicable principles of contract construction. See, e.g., Sunseri v. Garcia & Maggini Co., 298 Pa. 249, 253 54 (1929); Kobin Coal Corp. v. Dep’t of Gen. Servs., No. 600 C.D. 2018, 2019 WL 114070, at *8 n.11 (Pa. Commw. Ct. Jan. 7, 2019). Interpretation of a force majeure clause will usually involve a determination of whether the event that allegedly precluded performance is specifically identified among the force majeure events listed in the provision.

Courts applying Pennsylvania law typically interpret such lists narrowly. See, e.g., Sunseri, 298 Pa. at 253 54 (interpreting force majeure clause listing “crop failure” to require total crop failure to excuse lack of performance); Kobin, 2019 WL 114070, at *8 n.11 (explaining force majeure clause did not apply because “equipment failure” was not specified in list that included “acts of God, civil disorders, and other like events”); see also STI Oilfield Servs., Inc. v. Access Midstream Partners, No. 3:13-CV-02923, 2017 WL 889541, at *12 (M.D. Pa. Mar. 6, 2017) (determining under Pennsylvania law that scope of force majeure clause was an issue for trial because “acts of God” and “action of the elements” were “not specific enough” to cover hurricanes as a matter of law). Additionally, even if the incident that caused the failure to perform falls within the categories of events that are included in the force majeure clause, the event “must have been beyond the party’s control and not due to any fault or negligence by the non-performing party” and must not have been “foreseeable.” Martin v. Dep’t of Envt’l Res., 120 Pa. Cmwlth. 269, 273–74 (1988). Furthermore, the party asserting force majeure must be able to show what actions it took to attempt performance. Id. The force majeure defense will only apply if the contract at issue contains a force majeure provision and one of the events listed in the clause could be read to include a pandemic or actions related to the pandemic, such as government stay-at-home orders.

Impossibility or Impracticability

Without such a clause, a Pennsylvania business will need to rely on other defenses to a breach of contract claim, such as the defense of impossibility or impracticability. Pennsylvania courts look to the Restatement (Second) of Contracts when evaluating this defense. See, e.g., Hart v. Arnold, 2005 PA Super 328 ¶¶ 30, 34 53 (2005) (“Pennsylvania courts regularly employ the Restatement (Second) of Contracts when resolving contract disputes.”). Section 261 of the Restatement (Second) of Contracts provides that a failure to perform contract obligations is excused “[w]here, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made . . . unless the language or the circumstances indicate the contrary.” Restatement (Second) of Contracts § 261 (Am. Law Inst. 1981), quoted in Step Plan Servs., Inc. v. Koresko, 12 A.3d 401, 411 (Pa. Super. Ct. 2010). Some Pennsylvania courts, however, have held that a party cannot assert impossibility or impracticability when it has continued to proceed under the original agreement despite changed circumstances. Instead, it should either terminate the contract or seek a waiver of non-performance from the counterparty in order to assert the defense. See Hart, 2005 PA Super 328 ¶¶ 35, 38.

Importantly, although absolute impossibility is not required, performance must present “extreme and unreasonable difficulty, expense, injury, or loss to one of the parties” in order to be excused. Dorn v. Stanhope Steel, Inc., 368 Pa. Super. 557, 584 (1987) (quoting Restatement (Second) of Contracts § 261 cmt. d (Am. Law Inst. 1981)). The defense is not available “if the performance remains practicable and it is merely beyond the party’s capacity to render it” because “a party generally assumes the risk of his own inability to perform his duty.” Craig Coal Min. Co. v. Romani, 355 Pa. Super. 296, 300 (1986) (quoting Restatement (Second) of Contracts § 261 cmt. e (Am. Law Inst. 1981)). For this reason, unanticipated economic circumstances are typically not sufficient under Pennsylvania law to excuse performance unless they are “well beyond the normal range.” See Dorn, 368 Pa. Super. at 586; see also Step Plan Servs., Inc., 12 A.3d at 412–13 (“An individual’s financial position, for example, cannot generally be an implied ‘basic assumption’ of a contract, nor will it excuse a party’s performance.”); In re Land Conservancy of Elkins Park, Inc., No. ADV 10-499, 2013 WL 504888, at *3 (E.D. Pa. Feb. 11, 2013) (applying Pennsylvania law and explaining that “[t]he continuation of existing market conditions and of the financial situation of the parties are ordinarily not” basic assumptions underlying contracts, and so “mere market shifts or financial inability do not usually” excuse performance) (quoting Restatement (Second) of Contracts § 261 cmt. b (Am. Law Inst. 1981))).

In contrast, Pennsylvania courts have long viewed an intervening regulation or judicial order that precludes performance as an event that may give rise to a defense of impossibility or impracticability. Sch. Dist. of Borough of Olyphant v. Am. Sur. Co. of N.Y., 322 Pa. 22, 29 (1936) (citing Restatement (First) of Contracts § 458 (Am. Law Inst. 1932)); Hart, 2005 PA Super 328 ¶¶ 34, 38 (quoting Restatement (Second) of Contract § 264 (Am. Law Inst. 1981)). In fact, the Pennsylvania Superior Court has previously held that regulations limiting economic activity can excuse performance as impracticable. In a pair of cases, Litman v. Peoples Natural Gas and Kasemar v. National Fuel Distribution Corp., plaintiffs who had entered into contracts with the defendant gas companies to deliver natural gas service to multi-unit residential properties alleged breach of these agreements. The defendant gas companies argued that performance was prohibited by an order of the Public Utility Commission, which barred gas companies from entering new service contracts beyond their peak capacity in response to a natural gas shortage. See Litman v. Peoples Nat. Gas Co., 303 Pa. Super. 345, 348 (1982); Kasemer v. Nat’l Fuel Gas Distrib. Corp., 279 Pa. Super. 334, 338 41 (1980), aff’d, 495 Pa. 284, (1981). The Superior Court agreed that the order precluded the gas companies from performing, and thereby excused them from liability for breach of contract. Litman, 303 Pa. Super. at 352 54; Kasemer, 279 Pa. Super. at 338 41. Here, government orders shutting down businesses that are not “life-sustaining” may give rise to an impossibility or impracticability defense for businesses forced to close by those orders.

Commercial Impracticability Under the Uniform Commercial Code

For contracts involving the sale of goods, Article 2, § 615 of the Uniform Commercial Code (UCC), codified in Pennsylvania at 13 Pa.C.S. § 2615(1), may also excuse performance by the seller. The Pennsylvania statute states, in relevant part:

Delay in delivery or non-delivery in whole or in part by a seller . . . is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

The statute further requires the seller to “notify the buyer seasonably that there will be delay or nondelivery.” 13 Pa.C.S. § 2615(3); id. § 1205(b) (defining “seasonableness”).

The UCC impracticability defense is subject to limitations similar to those to the impracticability defense under Pennsylvania common law; indeed, courts applying the UCC will look to common law or the Restatement for guidance. See, e.g., Specialty Tires of Am., Inc. v. CIT Grp./Equip. Fin., Inc., 82 F. Supp. 2d 434, 438 (W.D. Pa. 2000); Record Corp. v. Logan Constr. Co., 22 Pa. D. & C.3d 358, 363 (Pa. Com. Pl. 1982). For example, generalized market or economic conditions are insufficient to excuse performance, “for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover.” 13 Pa.C.S. § 2615 cmt. 4; see also Hancock Paper Co. v. Champion Int’l Corp., 424 F. Supp. 285, 290–91 (E.D. Pa. 1976), aff’d, 565 F.2d 151 (3d Cir. 1977). However, “a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his performance is within the contemplation of [the] section.” 13 Pa.C.S. § 2615 cmt. 4.

Frustration of Purpose

Like the impossibility or impracticability defense, the doctrine of frustration of purpose excuses contract performance “[w]here . . . a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made.” Dorn v. Stanhope Steel, Inc., 368 Pa. Super. 557, 585 (1987) (quoting Restatement (Second) of Contracts § 265 (Am. Law Inst. 1981). In evaluating claims of frustration of purpose, Pennsylvania courts again look to the Restatement (Second) of Contracts. See, e.g., Step Plan Servs., Inc. v. Koresko, 12 A.3d 401, 413 (Pa. Super. Ct. 2010); Dorn, 368 Pa. Super at 585. Frustration of purpose “arises when a change in circumstances makes one party’s performance virtually worthless to the other” but does not actually impede either party’s performance. Step Plan Servs., 12 A.3d at 413 (quoting Restatement (Second) of Contracts § 265 cmt. a (Am. Law Inst. 1981)). Importantly, the contractual “purpose” that has been affected “must be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense,” rather than merely a but-for cause of a party’s assent to the contract. Id.

Although § 265 of the Restatement (Second) of Contracts describes frustration of purpose as a “distinct” defense from impracticability, Pennsylvania courts often refer to the doctrines interchangeably and apply similar limitations to the defenses. See, e.g., id. at 413 15; Hart v. Arnold, 2005 PA Super 328, ¶¶ 34, 38 (2005); Dorn, 368 Pa. Super at 584 88. For example, a “foreseeable” circumstance, including generalized economic or business conditions, generally will not give rise to the frustration of purpose defense. Step Plan Servs., 12 A.3d at 413; see also Dorn, 368 Pa. Super. at 586 88.

Although not specifically addressed by Pennsylvania courts, a well-known example described in the comments to the Restatement illustrates the application of this defense. In the example, an individual agreed to rent a room to view a coronation parade that was later canceled because the king was ill. The court ruled that the renter was excused from paying for the room because the purpose of the rental agreement was to view the parade. Consequently, frustration of purpose might be a useful defense where an agreement relates to an event cancelled due to COVID-19, such as a conference, concert or sporting event.

Contracts Against Public Policy

Finally, in light of the serious public health concerns created by COVID-19 and the resulting actions by state and local governments, the principle that courts may not enforce contracts that are illegal or violate public policy could apply in some circumstances. In general, under Pennsylvania law, a “contract which violates a statute is illegal and will not be enforced.” 340B Mgmt., LLC v. RX Blue Star Sols., LLC, 176 A.3d 1001, 1004 n.2 (Pa. Super. Ct. 2017) (quoting Robinson Coal Co. v. Goodall, 72 A.3d 685, 690 (Pa. Super. 2013)). Similarly, “clearly expressed public policy” may override an otherwise enforceable agreement. Eichelman v. Nationwide Ins. Co., 551 Pa. 558, 563 (1998). The types of public policies that may void a contract are narrow:

In the absence of a plain indication of [a] policy through long governmental practice or statutory enactments, or of violations of obvious ethical or moral standards, the Court should not assume to declare contracts . . . contrary to public policy. The courts must be content to await legislative action. . . .

It is only when a given policy is so obviously for or against the public health, safety, morals or welfare that there is a virtual unanimity of opinion in regard to it, that a court may constitute itself the voice of the community in so declaring [that the contract is against public policy].

Id. (emphasis added). Courts applying Pennsylvania law have therefore frequently declined to find that a contract violates public policy when performance does not clearly violate the law. See, e.g., Prusky v. Reliastar Life Ins. Co., 445 F.3d 695, 701–02 (3d Cir. 2006). If, however, a business can demonstrate that it cannot fulfill its contractual obligations without violating a government order relating to COVID-19, it may have a colorable defense to a breach of contract claim.

Conclusion: Considerations in the Face of COVID-19

In view of the Pennsylvania contract law principles outlined above, businesses considering the impact of COVID-19 on their contractual rights and obligations should reflect on the following:

  • What do your contracts say? An assertion of the force majeure defense generally requires a force majeure clause in the relevant agreement. Without such a clause, Pennsylvania courts will typically require performance of the contract unless one of the other defenses described above applies. The terms of a particular contract are therefore of paramount importance in evaluating whether the force majeure defense applies. If, for example, the agreement specifically address epidemics, pandemics, business interruptions or government shutdowns, the defense should be strong, but it will be weaker and more expensive to assert if it includes more general terms like Acts of God. Businesses should also review their contracts for any procedural or other requirements, such as notice provisions or obligations to mitigate damages.
  • What is the nature of the impact of COVID-19 on your or your counterparties’ business or operations? In the absence of a force majeure clause, a business may have other defenses, such as impossibility or impracticability, assuming the contract is silent on these defenses. However, these defenses typically do not excuse performance based on generalized market or financial circumstances or because market conditions render a contract less profitable. Consider how the COVID-19 crisis has affected your or your counterparty’s operations. Are you or your counterparty prohibited from operating your business by governmental order? Has the pandemic affected availability of supplies essential for performance? Is your or your counterparty’s inability to perform total? If the answer to these questions is yes, you or your counterparty may be able to assert an impossibility or impracticability defense.
  • Can you and your counterparty agree on a resolution to the issue? Although the ongoing uncertainty that the COVID-19 pandemic presents could cloud negotiations, many of the applicable defenses discussed above are fact-specific and could be expensive to litigate. As a result, it is worth exploring whether the parties to a contract can come to an agreement regarding how they will operate under these unprecedented circumstances. Before negotiating an amendment, it may be helpful to assess the strengths of any excuses for nonperformance, and we hope the above summary will assist businesses entering into such a negotiation.

As the number of cases around the world grows, Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.

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