Written and oral contracts imposing business commitments – for example, contracts by businesses with their suppliers, their customers, their landlords or their tenants – are the lifeblood of commerce in New Hampshire and worldwide. However, the devastating economic and practical effects of the coronavirus pandemic resulting from lockdowns, social distancing, and coronavirus infections themselves have made it difficult or impossible for many New Hampshire businesses to fulfill business contracts to which they are parties.
There are three main New Hampshire contractual doctrines that you, as a New Hampshire business owner, may be able to rely upon to lawfully avoid obligations under existing commercial contracts to which you are a party. These are the doctrines of “force majeure” (a French phase meaning “greater force”); frustration of purpose; and impracticability. And if you are negotiating or considering negotiating a commercial contract, you should consider seeking to include terms in these contracts that will support the effectiveness of these doctrines if, after you’ve signed the contract, you need to avoid its obligations. But all of these doctrines can be defeated by a “hell-or-high-water” contract provision. Furthermore, you should not seek to rely on any of these purposes except on the advice of your lawyer. This column cannot provide you with legal advice.
A force majeure provision in a contract is one which excuses one or more parties’ performance of their contractual obligations when circumstances arise that are beyond the parties’ control and that make performance of these obligations impractical or impossible. The courts don’t like to enforce force majeure clauses. They will generally do so only in the following circumstances:
— The force majeure provision names specific event or acts of nature beyond the parties’ control. These may include severe weather events, acts of terrorism, riots, explosions, strikes, and epidemics and pandemics.
— The events covered by the force majeure provision must be beyond the reasonable control of the applicable party.
— The provision must identify the parties’ obligations during the force majeure event.
— The provision must specify the particular contract duties that the force majeure event will excuse. For example, a force majeure provision typically will not apply to an obligation to pay an amount due under a contract, such as rent or interest on a debt, unless the parties specifically so agree.
— The party asserting force majeure must be able to prove that it has taken all reasonable steps to avoid its nonperformance and to mitigate to the extent possible any damages or other negative effects resulting from the force majeure event.
– The asserting party must give the other party prompt notice of its reliance on force majeure.
The doctrine of frustration of purpose may apply when, for any valid reason, the specific purpose of the contract in question can no longer be fulfilled. For example, in January 2020, ABC, Inc., a widget manufacturer, enters into a contract with XYZ, Inc., a caterer, under which, on June 1, 2020, XYZ must cater a party at ABC’s office in Anytown, New Hampshire for XYZ’s 50 main customers residing in Anytown. However, on that date, every resident of Anytown is under lockdown because of the coronavirus. Obviously, the lockdown completely frustrates the purpose of ABC’s contract with XYZ.
The doctrine of impracticability (also known as the doctrine of “impossibility”) may apply when (i) an event outside the parties’ control occurs that the contract parties in question reasonably assumed would not occur, and (ii) this event makes it impossible for a party to the contract to perform its contract obligations. The event need not be a force majeure event.
However, it is not unheard of for a commercial contract to contain a “hell-or-high-water” provision that provides, in essence, that no event whatsoever will permit the parties to avoid performing their contract duties and that even if a party fails to perform because of a force majeure event, a frustration-of-purpose event or impracticability, the party will owe money damages to the other party. Obviously, no business should sign a contract that contains a hell-or-high-water provision unless it absolutely has to.
A final note: If a commercial contract includes a force majeure provision, a party to the contract will probably be unable to defend its non-compliance with the contract on the grounds of frustration of purpose or impracticability.
John Cunningham is a Concord tax and businesses lawyer and estate planner. He has published Drafting Limited Liability Company Operating Agreements and Maximizing Pass-Through Deductions under Internal Revenue Code Section 199A. Both are the leading books in their fields. If you have business or tax questions you’d like addressed in this column, call John at (603) 856-7172 or e-mail him at [email protected] John would like to thank Griffin Kmon, a UNH law student, for his assistance in the writing of this column.