Contracting (Around) COVID-19, 1120 SCBJ, SC Lawyer, November 2020, #56

• Author: By Molly Campolong
• Position: Vol. 32 Issue 3 Pg. 56

Contracting (Around) COVID-19

Vol. 32 Issue 3 Pg. 56

South Carolina BAR Journal

November, 2020

How do Pandemics, Natural Disasters, and Acts of God Impact Your Contractual Rights?

By Molly Campolong

For most of 2020, a virus has changed the way individuals, businesses, restaurants, event venues, and retailers operate and changed the way we live our lives. Is this an act of God? In contractual case law, the answer is unclear. What is clear is that COVID-19, pandemics and acts of God can hinder people’s willingness and ability to comply with contracts. This article will explore how and when performance under a contract is excused due to an unexpected event by examining: (1) state law; (2) force majeure provisions in contracts; and (3) implications in South Carolina.

I. State law

Contracts are interpreted in accordance with state law—and generally have a provision providing which state’s law governs the contract. After two or more parties have entered into a contract, a party may have a defense to performance under the contract if performance is impracticable or impossible.

Whether the standard is “impracticability” or “impossibility” depends on the state. Some states recognize no distinction between the standards for impracticability and impossibility of performance.^[1] However, the South Carolina Court of Appeals has indicated that impossibility of performance, as applied in South Carolina, is distinct from impracticability.^[2]

A. Impossibility of performance

In South Carolina, parties are excused from performing under a contract if performance is impossible. ^[3] Impossibility of performance applies when “performance is rendered impossible by an act of God, the law, or other party.”^[4]The party asserting impossibility of performance must show impossibility by the “greater weight of the evidence.”^[5] A recent case—Morin v. Innegrity, LLC—thoroughly describes both the origination and history of impossibility of performance and its application in South Carolina.

Impossibility is different than “unforeseen difficulty, hardship or added expense,” which are risks parties assume when they enter into a contract.^[6] Performance under a contract is impossible when “the thing to be done cannot by any means be accomplished.”^[7] If performance “is only improbable or out of the power of the obligor, it is not . . . impossible.”^[8] Further, failure to perform cannot be based on “subjective impossibility,” such as a failure to obtain financing, whether such failure is due to poverty, financial panic, or a third party.^[9]

South Carolina courts have rarely found performance under a contract impossible. In fact, only two published South Carolina appellate court cases have excused performance due to impossibility. Performance has been found to be impossible when: • it was prevented by the British invasion during the American Revolution;^[10] and

• when black eyed peas could not be delivered to a buyer because torrential rains destroyed the crop.^[11]

In contrast, performance under a contract has been found not to be impossible with more regularity. Performance has been found not to be impossible when: • a buyer could not obtain money to close on real estate, and the contract contained no financing contingency;^[12]

• the buyer of a property contracted to build an access road in an exact location and failed to when the South Carolina Coastal Council and Army Corps of Engineers would not grant a permit for that specific location because the buyer could have taken additional steps, and the permit may have been granted;^[13] and

• a company contracted with a former employee to remove his name as a guarantor on loans and failed to do so because the company was insolvent, and the bank rejected its request to remove the former employee from the guaranty.^[14]

Thus, showing impossibility of performance has been a high burden.

B. Impracticability of performance and frustration of purpose

Turning to impracticability of performance, the Restatement (Second) of Contracts and many states excuse performance under a contract when performance is made impracticable or frustrated by some unforeseen event. ^[15] Under an impracticability theory, “[a] severe shortage of raw materials or of supplies due to war, embargo, local crop failure, unforeseen shutdown of major sources of supply, or the like,” which causes an increase in cost, would be an excuse for performance of a contract. ^[16] However, impracticability is still a high bar, as a change in the difficulty or expense caused by the unforeseen event does not reach impracticability unless “well beyond the normal range.”^[17]

The Uniform Commercial Code also provides for impracticability of performance. As a result, South Carolina does recognize impracticability of performance as an excuse to non-performance under contracts governing the sale of goods due to its adoption of the Uniform Commercial Code.^[18] The Uniform Commercial Code, as adopted in South Carolina provides: Except so far as a seller may have assumed a greater obligation . . . delay in delivery or non-delivery . . . 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 nonoccurrence 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.^[19]

This language is intentionally not exhaustive. ^[20] However, “[i]ncreased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance,” and collapse of a market for the goods is not “in itself a justification” to excuse performance. ^[21]

II. Force majeure provisions

In addition to state law, many contracts have what are known as “force majeure” provisions. South Carolina law is clear that “subjective impossibility of performing”— rather than objective impossibility—“ does not relieve a party from the contract unless the contract so states.”^[22] So, as detailed in Morin, parties began inserting force majeure and other clauses into contracts in order to excuse performance in instances where state law is silent.^[23]

Force majeure provisions excuse performance of one or both parties in the event of unforeseeable circumstances that prevent performance under the contract. Force majeure provisions are present in event contracts, commercial leases, entertainment contracts, sale agreements, real estate contracts, rental contracts, and more. Though there is no standard form used, force majeure provisions generally excuse performance if a party is either delayed or prevented from performing due to natural disaster, war, terrorism, strike, labor trouble, or acts of God. Some contracts also excuse performance for disease or epidemic in the applicable region, events impacting government services or functions, or governmental authority. Finally, many include general catch-all language in conclusion, such as “and other similar events” or “and other events outside the control of the parties.”

Each force majeure provision is different, and its interpretation depends on the type of contract at issue and the specific scenario. In leases, for example, force majeure provisions are used in a variety of ways. Some leases do not excuse payment of rent in the event the force majeure clause is triggered but excuse a landlord’s performance of its obligations in the lease. Others excuse a tenant’s payment of rent for the duration of the triggering event. Still others do not excuse a tenant’s payment of rent but do excuse other defaults in the lease—such as a default for not occupying the space in accordance with the lease—during the triggering event.

There is little case law in South Carolina on interpreting force majeure provisions.^[24] While South Carolina courts have often referenced acts of God, there is no comprehensive definition.^[25] Further, South Carolina courts have not yet interpreted the catch-all language that exists at the end of many force majeure provisions.

Looking to how courts in other jurisdictions have analyzed force majeure provisions, they seem to have taken a variety of approaches. The Third Circuit Court of Appeals has found that for a force majeure provision to excuse nonperformance under a contract in any circumstances, the burden is on the non-performing party to show the event was both (1) beyond its control; and (2) occurred without fault or negligence.^[26] In contrast, the Fifth Circuit Court of Appeals has determined that an event specifically listed in the force majeure provision need not be beyond control and unforeseeable if the event is provided for in the force majeure provision and the force majeure provision does not require this standard.^[27]

In 2018, the Texas Court of Appeals, Houston Division, analyzed a force majeure clause that included catch-all language providing for “any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected.”^[28] In that case, the defendant did not meet a deadline to test-drill land for oil and gas due to economic downturn of the oil and gas industry.^[29] The Texas court found that when parties specify a particular event in the force majeure provision, the event need not be unforeseeable to excuse performance.^[30] However, the court determined that the catchall language in the case could only encompass unforeseeable, not foreseeable events and that economic downturn was a foreseeable event. In reaching this conclusion, the court relied on (a) common law in Texas requiring unforeseeable events to excuse performance; and (b) the contractual canon of ejusdem generis.^[31] Specifically looking at ejusdem generis—the canon providing when “general words follow an enumeration of two or more things, they apply only to . . . things of the same general kind or class specifically mentioned”—the court found that economic downturn of the oil and gas industry was not the same type of event as the others listed in the provision—“fire, flood, storm, act of God, governmental authority, labor disputes, [&] war.”^[32]

Looking to the Fourth Circuit Court of Appeals, in Langham-Hill Petroleum, Inc. v. Southern Fuels Co.,^[33] the court found that summary judgment was appropriate on a breach of an oil purchase contract case. Oil prices dropped dramatically, and the supplier attempted to use the contract’s force majeure provision to excuse its obligation to sell the oil at a set price.^[34] The contract’s force majeure clause, which the court characterized it as “boilerplate language” provided: If either party is rendered unable by force majeure, or any other cause of any kind not reasonably within its control, wholly or in part, to perform or comply with any obligation or condition of this Agreement, . . . such obligation or condition shall be suspended during the continuance of the inability . . . and such party shall be relieved of liability and shall suffer no prejudice for failure to perform the same during such period; provided obligations to make payments then due for products delivered hereunder shall not be suspended. . . . The term “force majeure” shall include, without limitation by the following enumeration, acts of God, and the public enemy, the elements, fire, accidents, breakdowns, strikes, differences with workmen, and any other industrial, civil or public disturbance, or any act or omission beyond the control of the party having the difficulty, and any restrictions or restraints imposed by laws, orders, rules, regulations or acts of any government or governmental body or authority, civil or military.^[35]

The court affirmed the circuit court’s grant of summary judgment, providing “[a] force majeure clause is not intended to buffer a party against the normal risks of a contract” and the normal risk of a fixed price contract is that prices will change.^[36]

In the one South Carolina opinion specifically analyzing a force majeure clause, Coker International, Inc. v. Burlington Industries, Inc., 747 F.Supp. 1168 (D.S.C. 1990), the plaintiff sought to rescind its agreement to purchase used textile looms from the defendant because “actions of the government of Peru” prevented the plaintiff’s resale of the looms.^[37] The contract at issue had a force majeure provision which provided “[d]eliveries may be suspended by either party in case of act of God . . . or any cause beyond the control of such party, preventing the manufacture, shipment, acceptance, or consumption of a shipment of the Goods.”^[38] Not surprisingly, the court found that force majeure provision did not excuse the plaintiff’s contractual obligation to purchase the looms.^[39]

III. Implications in South Carolina

There have been several breach of contract cases in South Carolina since the beginning of the COVID-19 pandemic with one side arguing a breach was necessary or justified due to COVID-19.^[40] However, none of these have made their way to South Carolina appellate courts

An Illinois bankruptcy court did recently interpret a force majeure clause in the context of COVID-19. In that case, a restaurant debtor’s lease provided: Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by . . . laws, governmental action or inaction, orders of government. . . . Lack of money shall be no grounds for Force Majeure.^[41]

The court found this force majeure provision was implicated by the Illinois governor’s executive order related to COVID-19, which suspended on-premises dining but did not suspend take-out, curbside pick-up, and delivery services.^[42] The court determined the allowed services required 25 percent of the leased square footage and abated 75 percent of the restaurant’s rent from the date of the order forward.^[43] Additionally, it did not matter that the restaurant could have applied for a Small Business Administration loan and failed to do so—the force majeure provision was triggered by government action or orders, and “[n]othing in the clause requires the party adversely affected by governmental action or orders to borrow money to counteract their effects.”^[44]

What result will South Carolina courts reach? The answer is yet to be seen. Coker International seems to support that South Carolina courts may primarily rely on the rules of contract interpretation to analyze force majeure provisions. However, the other force majeure cases discussed above show that courts in the Fourth Circuit and elsewhere have at least considered common law excuses for performance when analyzing force majeure provisions. This dual approach seems consistent with South Carolina law, especially given a portion of the Morin opinion. In discussing the history of impossibility of performance in South Carolina, the court in Morin discussed how the failure of force majeure provisions to contemplate all potential excuses for performance of a contract has made impossibility of performance act as a “gap filler” for when there is no force majeure provision, or the force majeure provision does not cover a specific event that makes performance impossible.^[45]

IV. Conclusion

It will be interesting to see how case law on impossibility of performance and force majeure provisions continues to develop in South Carolina. Like all breach of contract cases, the outcome of each failure to perform under the terms of a contract in 2020—and beyond—due to COVID-19, acts of God, or some other event will depend on the language of the contract itself and the circumstances surrounding non-performance.

Molly Campolong is an attorney at Robinson, Gray, Stepp & Laffitte, LLC where she focuses on commercial real estate transactions and litigation, including bankruptcies and workouts.

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Notes:

[1] ^[1] See Morin

v. Innegrity, LLC, 424 S.C. 559, 567, 819 S.E.2d 131, 136 (Ct.App. 2018), reh’g denied (Oct. 18, 2018) (discussing jurisdictions’ modernization of the doctrine of impossibility); Restatement (Second) of Contracts § 261 cmt. d (1981); 17A Am.Jur.2d Contracts § 643 (2d. ed. 2006).

[2] ^[2]See Morin, 424 S.C. at 569, 819 S.E.2d at 137.

[3] ^[3] See id. at 567, 819 S.E.2d at 136; see also Pearce-Young-Angel Co. v. Charles R. Allen, Inc., 213 S.C. 578, 586, 50 S.E.2d 698, 701 (1948); Moon v. Jordan, 301 S.C. 161, 164, 390 S.E.2d 488, 490 (Ct.App. 1990).

[4] ^[4] Jones v.

Bates, 241 S.C. 189, 127 S.E.2d 618 (1962).

[5] ^[5]Morin, 424 S.C. at 567, 819 S.E.2d at 136.

[6] ^[6] S.C. Code Ann. § 36-2-615 (2003) (South Carolina Reporter’s Comment).

[7] ^[7] Morin, 424 S.C. at 567, 819 S.E.2d at 136 (Ct.App. 2018) (quoting Hawkins v. Greenwood Dev. Corp., 328 S.C. 585, 593, 493 S.E.2d 875, 879 (Ct.App. 1997)).

[8] ^[8]Id.

[9] ^[9] Moon, 301 S.C. at 164, 390 S.E.2d at 490; see also B’s Co. v. B.P. Barber & Assoc., Inc., 391 F.2d 130 (4th Cir. 1968).

[10] ^[10] Ordinary of

Charlestown Dist. v.

Corbett & Lightwood, 1 S.C.L. 328, 323 (1793).

[11] ^[11] Pearce-Young-Angel

Co. v. Charles R.

Allen, Inc., 213 S.C. 578, 586, 50 S.E.2d 698, 701 (1948) (decided prior to the adoption of the Uniform Commercial Code in South Carolina).

[12] ^[12] See Moon, 301 S.C. 1 at 164, 390 S.E.2d at 490; Morin, 424 S.C. at 570, 819 S.E.2d at 137.

[13] ^[13] Hawkins., 328 S.C. at 592, 493 S.E.2d at 879.

[14] ^[14]Morin, 424 S.C. at 567, 819 S.E.2d at 136.

[15] ^[15] Restatement (Second) of Contracts § 261 (1981).

[16] ^[16] Restatement (Second) of Contracts § 261 cmt. d.

[17] ^[17] Id.

[18] ^[18]S.C. Code Ann. § 36-2-615(a) (2003) (part of South Carolina’s adoption of the Uniform Commercial Code).

[19] ^[19] Id.

[20] ^[20] S.C. Code Ann. § 36-2-615 (Official Comment n.4).

[21] ^[21]Id.

[22] ^[22] Coker

Intern., Inc. v.

Burlington Industries, Inc., 747 F.Supp. 1168 (D.S.C. 1990) (citing Moon, 301 S.C. 161, 390 S.E.2d 488), aff’d 935 F.2d 267 (4th Cir. 1991).

[23] ^[23] 424 S.C. at 568, 819 S.E.2d at 136.

[24] ^[24] See Practical Law Commercial Transactions, Force Majeure State Case Law Summary Chart: Overview (Table: Summary of Force Majeure Legal Authority by State) (May 28, 2020).

[25] ^[25]See, e.g.,

Moon, 301 S.C. at 164, 390 S.E.2d at 490; Arkwright Mills v. Clearwater Mfg. Co., 217 S.C. 530, 550, 61 S.E.2d 165, 174 (1950) (a fash of lightening is an act of God); Muldrow v. Wilmington & M.R. Co., 47 S.C.L. (13 Rich.) 69 (Ct.App. 1860) (death of a person is an act of God);

[26] ^[26] Gulf Oil

Corp. v. F.E.R.C., 706 F.2d 444, 453-54 (3d Cir. 1983).

[27] ^[27] Perlman v.

Pioneer Ltd. Partnership, 918 F.2d 1244, 1249 (5th Cir. 1990).

[28] ^[28] TEC Olmos,

LLC v. Conoco Phillips

Company, 555 S.W.3d 176, 183-84 (Tex Ct.App. 2018).

[29] ^[29] Id. at 180.

[30] ^[30] Id. at 183-186.

[31] ^[31]Id. at 185-86.

[32] ^[32]Id. at 185-86 (citing Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 199 (2012)).

[33] ^[33] 813 F.2d 1327 (4th Cir. 1987).

[34] ^[34] Id.

[35] ^[35] Id.

[36] ^[36] Id.

[37] ^[37] 747 F.Supp. 1168, 1170 (D.S.C. 1990), aff’d, 935 F.2d 267 (4th Cir. 1991).

[38] ^[38] Id.

[39] ^[39] Id.

[40] ^[40] See, e.g.

Urban Nirvana LLC v.

Big V. Properties, Civ. Case No. 2020-CP-32-0244 (Lex. Court of Common Pleas, July 17, 2020) (voluntarily dismissed Aug. 3, 2020); Gather GVL, LLC v. Coco Bowlz, Civ. Case No. 2020-CP-23-02916 (Gvl. Court of Common Pleas, June 10, 2020); Allen v. Duvall Catering & Events, LLC, Civ. Case No. 2020-CP-00-01589 (Chs. Court of Common Pleas, March 25, 2020) (dismissed May 21, 2020).

[41] ^[41] In re

Hitz Restaurant Group, Bankr. Case No. 20-05-012, slip. op at *2 (Bankr. N.D.Ill. June 3, 2020).

[42] ^[42] Id. at 2-5.

[43] ^[43] Id.

[44] ^[44] Id. at 5.

[45] ^[45] 424 S.C. at 567, 819 S.E.2d at 136.

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