COVID-19 and Contract Performance: May I Be Excused?

By Sakib A. Khan, Esq. and Benjamin Roberts

In addition to its health risks, COVID-19 has disturbed our businesses and the entire economic system of our country.  We are learning how courts will factor these disruptions in when judging contract performance and evaluating breach.

In one of the first cases addressing how Massachusetts courts will consider COVID-19’s effects on the ability of parties to perform contracts, Martorella v. Rapp, Judge Michael D. Vhay of the Massachusetts Land Court ruled that a home buyer’s wife’s hospitalization with COVID-19 did not excuse the failure to make the closing date, even when the home buyer’s wife’s availability was integral in securing financing for the purchase.

In February 2020, the buyer made a deposit and signed a purchase and sale agreement to close the following month. The P&S would become void and the deposit retained as liquidated damages if the buyer did not meet the deadline. The P&S did not include any financing contingency clause. Unknown to the seller, the buyer required his wife to secure a mortgage for the closing. 

In March, the buyer and seller agreed twice to extend the deadline due to the coronavirus pandemic. In mid-March, the wife was notified by her bank that the couple had qualified for a mortgage. Unfortunately, the wife subsequently became ill with COVID-19 and was hospitalized. The husband then self-quarantined and requested a third extension, but the seller refused. The buyer missed the closing date and was unable to recover his deposit. 

The buyer argued that his breach of the P&S should be excused by the doctrine of impossibility, which excuses performance of a contract, where from the beginning, both parties have understood that the continued existence of a specific thing is a foundation of what was to be done and that thing becomes impossible to do without fault of either party. The buyer’s argument was essentially that a pandemic free environment was a mutual assumption and the end of the pandemic free environment rendered the buyer’s performance of the contract, that is closing on the closing date, impossible.

The court rejected the buyer’s argument on two grounds. First, the seller was not aware of the buyer’s reliance on financing to be able to pay for the closing was fundamental to his agreement. The contract explicitly stated that there were “no contingencies affecting [his] obligation to perform.” The seller thought that the buyer would have enough cash to close and did not understand that financing was foundational to the agreement. Second, the person who suffered incapacity due to COVID-19 was the wife, not the husband. The seller was not aware that the buyer relied on his wife’s ability to secure a mortgage to deliver payment. The husband’s performance would have only been excused if the seller understood that the wife’s involvement was foundational to the transaction.

While this seems like a harsh decision because the devastating effects of COVID-19 on the family could not have been foreseen, the seller was unaware of the buyer’s reliance on financing secured by another party and the buyer himself was not suffering from COVID-19.   Additionally, the buyer in that case did not argue (but could have argued) that the seller’s refusal to grant a further extension of the closing date when the buyer was self-quarantined and the Commonwealth was under a “stay at home” advisory from the Governor (thus likely impeding the seller’s ability to re-market the property in any event) as a breach of the implied covenant of good faith and fair dealing.

Despite the strict nature of this decision, Contractors with projects affected by COVID-19 may have a more convincing argument for impossibility. First, prime construction contracts (including the commonly used AIA documents) tend to expressly define the roles and expectations of Subcontractors, Designers and other non-parties upon whom the parties to the contract depend on to perform their obligations. Further, there is an industry understanding of the fundamental relationships between the parties in a project. Owners should be aware that Contractors often rely on other parties in a project. It would not be a surprise that the Contractor’s work was made impossible by a Subcontractor failing to work due to COVID-19, supply chain disruptions, acute labor shortages, quarantine orders and the like.

Parties may also proactively protect themselves by including force majeure clauses which excuse performance when circumstances outside of their control make performance impractical or impossible.  For example, the unmodified AIA A201-2017 provides for extensions of time for circumstances outside of the contractor’s control, as long as the Architect agrees.  See A201 § 8.3.3(5).

Contractors should consult with counsel if their work has been made impossible by COVID-19 to see if they may be excused from performance.

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