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...