Contracts and COVID-19

Abstract

The COVID-19 pandemic of 2020—as well as government orders to contain it—has prevented countless people, babysitters to basketball players, from fulfilling their contracts. Are all of these parties legally liable for breaching their contracts? Or are they excused due to this extraordinary event? What about payments made in advance, such as tickets bought for a concert that has now been canceled, or a dorm room leased at a college that is now closed?

This coronavirus is new, but wars, floods, and even other pandemics have upset innumerable contracts over the years. In response, our courts have established a fairly clear set of legal rules—most importantly the doctrines of ‘Impossibility’ and ‘Restitution’—to answer these questions. Beyond that, contracting parties can, and often do, “contract around” these legal doctrines by including a ‘Force Majeure’ clause, which specifies what should happen in case of an ‘Act of God’ like the coronavirus.

Part I of this Essay describes the legal doctrines of Impossibility and Restitution and how they might apply to a contract undermined by the COVID-19 pandemic. Part II explains how a Force Majeure clause alters those background doctrines to give—or withhold—relief to a party whose performance has been thwarted by the pandemic.

Finally, Subpart II.C peers into the future and predicts that many parties will likely revise their Force Majeure clauses to ensure they cover a pandemic like this. While such a revision may seem obvious from a legal perspective, it may not be optimal from a business perspective, as it may lead counterparties to greatly lower the price they are willing to pay—or even refuse entirely to make a deal. Indeed, some parties may conclude that the default Impossibility doctrine provides better protection than a Force Majeure clause, as it covers any and all unexpected cataclysms, not just those expressly listed in the contract.

Keywords: Contract, COVID-19, Coronavirus, Pandemic, Impossibility, Force Majeure, Act of God, Restitution

JEL Classification: K00, K1, K12, I1, I18