Contract Breaches Caused by COVID-19 in Wisconsin

Posted by Attorney David J. Espin in COVID-19 / Comments

Many businesses across Wisconsin are grappling with the uncertainties caused by the recent COVID-19 outbreak.  Among these concerns is what effect the outbreak and the ensuing fallout will have on the various agreements these businesses have with their customers, vendors, and creditors.  The answer will generally depend on whether a contract contains a “force majeure” provision, and if it does not, whether the outbreak and associated government orders would frustrate contract’s purpose.

Force Majeure Clauses

Force majeure, or “act of god” provisions, are included in many commercial contracts.  They generally excuse a party from the obligation to perform on a contract if events outside of the party’s control prevent the party from fulfilling its contractual obligations.  These provisions range from incredibly broad, to specific itemized lists.  For example, a provision may indicate that a party is excused from performing its obligations upon a breach caused by an “event beyond its reasonable control.”  Or, in addition to such a broad blanket provision, there may be a list of specific circumstances that would qualify, which often include events like wars, acts of terrorism, natural disasters, power failures, or pandemics.  On March 11, 2020, the World Health Organization formally declared COVID-19 to be a pandemic.

One other provision that business owners intending to invoke a force majeure clause should be sure to look for is any provision requiring them to provide notice to their counter-party.  There is often a requirement that formal written notice of such invocation be provided in a certain manner and within a specified time frame, and if such notice is not properly provided, a party may lose the legal protections of the force majeure clause.

Frustration of the Contract’s Purpose

In the event a contract does not contain a force majeure clause, Wisconsin courts also recognize the doctrine of “frustration of purpose.” The party arguing that the purpose of its contract has been frustrated has the burden to show that (1) the party’s principal purposes in making the contract is frustrated; (2) without that party’s fault; and (3) by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made. If a party can show these elements have been met, its obligations under the contract are excused. The intent of the doctrine is to address situations where an unforeseen change in circumstances renders one party’s performance virtually worthless to the other, frustrating the entire reason it entered into the contract in the first place.  

One caveat to the doctrine is that the frustration must be “substantial.”  It is not enough that an event has caused the contract to be less profitable for a party, or even that fulfilling the contract would cause the party to experience a large loss.  The unexpected circumstance must render the contract “virtually worthless” or “meaningless.”  

Finally, the unforeseen event must also be a risk that the parties could not have reasonably anticipated when they entered into the contract. For example, a farmer that has agreed to sell a certain amount of its harvest to a buyer at a given price could not demand that its contractual obligations be excused because the weather did not cooperate and a portion of the crop was damaged.  Such a risk would be foreseeable, and a court would likely find that such an obvious risk should have been dealt with by the parties in the contract.

How Would This All Apply to Contract Breaches Caused by COVID-19?

For any contracts that contain a force majeure provision with an express reference to pandemics, such party would likely be excused from performing any obligations it cannot perform due to COVID-19, or any national, state, or local government orders passed because of COVID-19.  Such parties should provide any required notice of their intent to invoke the force majeure provision immediately.

For other situations, it will likely depend on the facts of each case, many of which will not be known for weeks or months.  Right now, we do not know how long the COVID-19 pandemic will last, and thus we can only speculate as to how long government orders requiring “social distancing” and mandating the closure of “non-essential” businesses will remain in effect. 

The experienced business attorneys at Petrie + Pettit can help to assess your unique circumstances and determine the best course of action for your situation.