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COVID-19 and Contract Enforceability

By: Daniel A. Kaminsky

In the coming days, weeks, and months, it is likely that we will see failures to perform under contracts that are related to COVID-19 (e.g., failures to perform arising out of the ongoing temporary closures of businesses and institutions across the State of Wisconsin, the United States of America, and globally).   As discussed in Davis|Kuelthau’s article linked here, contracts often have force majeure clauses that allocate the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.  But what happens if there is no force majeure clause in a contract or a contract is otherwise silent with respect to pandemics, epidemics, and similar intervening events that prevent performance?  Courts typically do not want to excuse performance, and there is a strong impulse in the law to enforce contracts as written.[1]  That being said, Wisconsin courts do recognize legal doctrines where performance under a contract is excused, including, but not necessarily limited to, the legal doctrines described in this article.  Whether COVID-19 excuses performance under a contract will depend on the applicable contract language, the attendant facts, and, in some instances, the application of the legal doctrines described below.  If, in light of COVID-19 and its ripple effects, you have questions about the enforceability of contracts, or the enforceability of a specific contract, please reach out to your Davis|Kuelthau, s.c. attorney, the authors linked above, or the related practice group chair linked here.

Legal Doctrines

Frustration of Purpose

Wisconsin courts have determined that the doctrine of frustration of purpose is a defense to the enforcement of a contract.  If the elements of the doctrine are satisfied, then a party’s obligations under the contract are excused.[2]  The elements of the frustration of purpose defense are as follows: (1) the party’s principal purposes in making the contract are frustrated, (2) the frustration was not that party’s fault, and (3) the frustration was caused by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made.[3]  The party asserting the defense has the burden to prove the frustration of purpose.[4]  The frustration of purpose doctrine does not apply where the risk of the event that has caused the alleged frustration was reasonably foreseeable and could have been anticipated by addressing the issue in the contract.[5]

Impossibility

Enforceability of a contract may be at issue if performance is impossible based on facts unknown to the promisor. Wisconsin courts have found that a promise imposes no duty, if the performance of the promise is impossible because of facts existing when the promise is made, of which the promisor neither knows, nor has reason to know.[6]

Impracticability

The doctrine of impracticability excuses performance, or delays in performance, if an intervening event materially changes the inherent nature of a party’s obligations which become substantially more difficult or challenging.[7]  These material changes often result in excessive and unreasonable costs for a party to perform.[8]

Anticipatory Breach

If you know one party will breach the contract prior to when they are required to perform, anticipatory breach may be an issue. In order to establish an anticipatory breach of a contract, Wisconsin courts require that there must be a definite and unequivocal manifestation of an intention of the repudiator, in which the repudiator will not give the promised performance when required under the contract.[9]  In short, the party must intentionally repudiate its obligation in advance.[10]  The non-repudiating party may regard the contract as terminated, so far as further performance is concerned, and maintain action immediately for damages.[11]

Conclusion

COVID-19 is likely to continue to strain businesses into the near future and possibly beyond.  The enforceability of contracts in light of COVID-19 will likely become a significant question in the coming days, weeks, and months.  If you have questions regarding this article or need further information related to enforceability of your contracts due to the effects of COVID-19, please reach out to your Davis|Kuelthau attorney, the author linked above, or the related practice group chair linked here.

We will continue to monitor the impact of COVID-19 and provide guidance to businesses via our Coronavirus Legal and Business Resource hub.

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[1] Convenience Store Leasing & Mgmt. v. Annapurna Mktg., 2019 WI App 40, ¶ 14, 388 Wis. 2d 353, 363, 933 N.W.2d 110.

[2] Id. (citing Chicago, Milwaukee, St. Paul & Pac. R.R. Co. v. Chicago & N.W. Transp. Co., 82 Wis. 2d at 522-24, 263 N.W.2d 189; Ryan v. Sheppard, 2010 WI App 105, ¶13, 328 Wis. 2d 533, 789 N.W.2d 616).

[3] Convenience Store, 2019 WI App 40, ¶ 15.

[4] Id. ¶ 14.

[5] Id. ¶ 17.

[6] In re Zellmer’s Estate, 1 Wis. 2d 46, 82 N.W.2d 891 (1957).

[7] Excuses for Non-Performance: Conditions Following Contract Formation, Practical Law Practice Note 1-553-6307.

[8] Id.

[9] Repinski v. Clintonville Fed. Sav. & Loan Ass’n, 49 Wis. 2d 53, 59–60, 181 N.W.2d 351 (1970).

[10] Id. (citing 4 Corbin on Contracts, § 974, pp. 914-15; Williston, Contracts (3d ed.), 1300; Wisconsin Dairy Fresh, Inc. v. Steel & Tube Products Co., 20 Wis.2d 415, 427, 122 N.W.2d 361 (1963)).

[11] Galvin v. Lovell, 257 Wis. 82, 86, 42 N.W.2d 456 (1950).