Can You Cancel a Contract Due to Coronavirus (COVID-19)?
Are you legally required to pay for expenses associated with an event that has been cancelled due to the coronavirus disease 2019 (COVID-19)? It may be helpful to know that long before the inevitable COVID-19 legal contract cases, there were the Coronation Cases of 1902.
The Coronation Cases were a group of lawsuits in England arising out of contracts to view the coronation of King Edward VII and Queen Alexandra.1 Many people had rented rooms specifically to view the procession, but the coronation had to be postponed when Edward’s appendix ruptured two days before the ceremony.
The individuals who had rented rooms to watch the procession wanted to get out of their rental contracts. Likewise, individuals who purchased tickets to watch sporting events or attend conventions during the COVID-19 outbreak want to get out of their contracts for cancelled events. But can they?
In 1902, the contractual defense of impossibility was available, but this was not enough to help people get out of paying for their rooms. Here’s why: The defense of impossibility is only available if performing the contract is objectively impossible. Edward’s illness didn’t make renting a room impossible. That is, the buildings hadn’t collapsed. Tenants were still able to occupy rooms along the would-be parade route and look out large windows to the empty streets below.2
The similar but distinct defense of impracticability did not suffice, either. This defense is only available when there is an unforeseen contingency that would result in an increased cost or burden far beyond what either party anticipated. For example, instead of renting a room to watch a modern day coronation or procession, you rent an entire building. What if the building you’ve rented isn’t destroyed, but the surrounding buildings collapse, and now you can only get to the building you rented by helicopter. It’s not impossible to get to your building, but the defense of impracticability will relieve your obligation to rent the building because of the unforeseen increased cost or burden.3
Frustration of Purpose
The unavailability of these defenses for the coronation cases led to the defense of frustration of purpose (also called commercial frustration).
The defense of frustration of purpose is available when 1) the principal purpose of the contract is substantially frustrated, and 2) the nonoccurrence of the event that caused the frustration was a basic assumption of the contract.4
The legalese in that second point is thick, but it means that the parties didn’t anticipate, insure against, or assume the risk of the frustration in any way. To give an example: If you make travel plans to go on a cruise during a pandemic because you’re offered a 14-day cruise for $140, you can’t say that the nonoccurrence of the cancellation is a basic assumption of your contract. You know there’s a good chance of cancellation, and that’s why you’re getting a great price.
Unlike such a cruise, it is safe to say that it was a basic assumption of those entering contracts in 2019, before the novel coronavirus spread, that their 2020 events wouldn’t be cancelled. They had no way to predict that attendees would need to self-quarantine for 14 days or that governors and the president would issue states-of-emergency declaring, “Don’t go.” If the warnings and cancellations that came during the pandemic substantially frustrated the principal purpose of the contracts, those seeking to void their 2020 coronavirus-impacted contracts can thank the Coronation Cases of 1902 for creating the defense of frustration of purpose.
How will the cases of cancelled contracts due to COVID-19 differ from the Coronation Cases of 1902? The coronavirus legal cases may have two new twists: supervening illegality and public necessity.
When a contract becomes illegal, the contract is void. For example, if we formed a contract to buy and sell Cuban cigars in 1961, and then the U.S. government declared in February 1962 that it is illegal to buy and sell Cuban cigars, our contract would be void. We can’t sue each other for nonperformance of our Cuban cigar contract any more than if we were suing each other for breaching contracts to illegally buy and sell heroin or cocaine on the street.
What does this mean for contracts during the COVID-19 outbreak? At the time of writing this, some nations and states are asking or encouraging individuals to self-quarantine or avoid travel. But other nations and states are requiring shutdowns and travel bans. If a declaration from the government makes performing your contract illegal, the contract becomes unenforceable, and any monies exchanged should be returned.5
Similarly, in tort law there is the defense of public necessity. This defense excuses otherwise tortious conduct if the conduct is necessary to avert an imminent public disaster. For example, ordinarily, your neighbors would need to compensate you if they diverted floodwaters on to your property, damaging your land. However, if they diverted floodwaters on to your land to save a city, their conduct would be excused because it was made with the purpose of alleviating the effects of a public disaster. Because of the defense of public necessity, the neighbors would owe you no money even if their actions caused harm to your property.6
Is it a stretch to suggest that the defense of public necessity—a defense that is normally only applied in tort law—might be available as a defense in coronavirus contract disputes? Perhaps. But even if it is not technically illegal to take a flight or stay at a hotel, the government has asked individuals to avoid travel or to self-quarantine. The Center for Disease Control has calculated that, in a worst case scenario, as many as “1.7 million people could die” from COVID-19.7 If traveling is required to perform a contract, but not traveling is necessary to alleviate the effects of an imminent public disaster, then the contractual damages resulting from not traveling should arguably be excused under the defense of public necessity.
In fact, traveling in spite of these warnings at some point could subject someone to liability for the tort of negligence (causing damages by breaching one’s duty to act like a reasonable person)8 or even battery (committing a voluntary, intentionally harmful or offensive contact to another person).9
Contract litigation arising out of the coronavirus pandemic of 2020 is almost certain. As we contemplate contract defenses in the coronavirus legal cases of 2020, it is helpful to look back to defenses once employed in the Coronation Cases of 1902.
1. Krell v. Henry (1903, C. A.), 2 K.B. 740. See also Heme Bay Steam Boat Co. v. Hutton (1903, C. A.), 2 K.B. 683.
2. 17B C.J.S. Contracts § 688, February 2020 Update (citing Inc. v. Eustace, 290 S.W.3d 332 (Tex. App. Eastland 2009), reh'g overruled (June 11, 2009)). See id. § 689 (legal impossibility). As to destruction of subject matter, see id., § 696 to § 699.
3. The defense of impracticability was established in 1916—after the Coronation Cases. Mineral Park Land Co. v. Howard ,172 Cal. 289 (1916). But like the defense of impossibility, the defense of impracticability would not apply to either the 1902 Coronation Cases or 2020 coronavirus cases. Jennifer Camero, “Mission Impracticable: The Impossibility of Commercial Impracticability,” 13 U.N.H.L. Rev. 1, 3–4 (2014); Sheldon W. Halpern, “Application of the Doctrine of Commercial Impracticability: Searching for ‘The Wisdom of Solomon',” 135 U. Pa. L. Rev. 1123, 1132 (1987).
4. 17A Am. Jur. 2d Contracts, § 638, Applicability of doctrine of frustration of purpose; Restatement (Second) of Contracts § 265.
5. Restatement (Second) of Contracts § 264, Prevention by Governmental Regulation or Order, provides: “If the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the nonoccurrence of which was a basic assumption on which the contract was made.” The common law thus excuses performance of a contract where it is made impossible or impracticable by a supervening governmental action. 2 A.L.R.7th, Art. 3 (2015).
6. Monica E. Eppinger, “The Challenge of the Commons: Beyond Trespass and Necessity,” 66 Am. J. Comp. L. 1, 18 (2018); Restatement (Second) of Torts, § 196 & cmts. a, b; Spade v. Lynn, 52 N.E. 747, 747 (Mass. 1899) (Holmes, J.); Surocco v. Geary, 3 Cal. 69 (1853) (trespass by the Alcalde of San Francisco, who destroyed plaintiff's house in attempt to halt the progression of a fire in the city, excused without obligation to compensate the homeowner under public necessity doctrine).
7. Sheri Fink, “Worst-Case Estimates for U.S. Coronavirus Deaths,” New York Times Online (March 13, 2020), https://www.nytimes.com/2020/03/13/us/coronavirus-deaths-estimate.html.
8. See Kenneth S. Abraham, The Forms and Functions of Tort Law, 2-3 (2d ed. 2002) (describing these elements as the “four elements of any cause of action in tort.”;); Alan Calnan, “The Fault(s) in Negligence Law,” 25 Quinnipiac L. Rev. 695, 749 (2007).
9. Restatement (Second) of Torts, § 13.