This article appeared as part of the 2020 Law Journal sponsored section in the October issue.
COVID-19 cancelled my event. What now?
By Chris Edwards
Ward and Smith, P.A.
Since March, businesses across North Carolina have been cancelling events at a breakneck clip. For example, my firm cancelled its annual retreat. In the face of Governor Roy Cooper’s executive orders, we had to hope that our host would accommodate our need to postpone.
A large-scale cancellation can have far-reaching consequences. Businesses spend tens, maybe hundreds of thousands of dollars planning their events—securing space, lodging, catering, and the like. When businesses are forced to cancel an event, what happens to all that money? More than that, often venues try to reschedule events. But let’s be realistic: in the wake of COVID-19, many businesses are probably angling for the same day; and not every company can host its convention, retreat, or golf tournament on the third Saturday in May 2021.
So what’s a business to do? How should it handle its cancelled reservation? Or, perhaps more importantly as we emerge from the virus, how should it deal with future disappointment? This article out-lines three considerations for determining what effect COVID-19 will have on your group event.
A force majeure clause is something of a “get out of jail free” card. These clauses, which may excuse contract performance in the event of an “act of God,” likely are the easiest way to determine your responsibilities, now that COVID-19 has ruined your event.
Many—but not all contracts contain force majeure clauses. To determine if your contract contains a force majeure clause, you must read the contract. Force majeure clauses aren’t always clearly labeled, but usually have a readily recognizable form. They often excuse performance under a contract in the event of an “act of God,” war, insurrection, or the like. The point is this: force majeure clauses often contain similar language.
A pandemic, like the one caused by COVID-19, may fall within the scope of your force majeure clause. Force majeure clauses are not created equal. Some, for example, expressly excuse performance in the event of a pandemic. If that is the case, you’re in luck; you likely are off the hook. Others are less clear. They may include only “act of God” language. As of now, it is unclear whether that language applies to the pandemic. Because COVID-19 is so new, that theory is untested.
Even if your force majeure clause covers COVID-19, your right to a refund depends on the clause’s language. Yes, it’s true. Some force majeure clauses allow one or both parties to undo the contract. In that instance, your obligation to pay likely will be excused. But other clauses will hold you to your bargain.
What if you have no written contract? Or what if your contract does not contain a force majeure clause? If relying on a force majeure clause isn’t an option, an alternative may be the doctrine of impossibility. The Supreme Court of North Carolina has recognized this doctrine.
Impossibility, though, is difficult to prove. In North Carolina, impossibility excuses the performance of a contract with a contract when “the subject matter of the contract is destroyed without fault of the party seeking to be excused from performance.” Brenner v. Little Red Sch. House, Ltd., 302 N.C. 207, 209 (1981).
Because COVID-19 will—at some point—pass, the doctrine of impossibility is probably a poor fit for most COVID-19 related cancellations. To apply the doctrine of impossibility, courts require a showing that the subject matter of the contract was literally and permanently destroyed. It is not enough that the subject matter of the contract is temporarily unavailable—even if that temporary unavailability might last for years. For example, the North Carolina Court of Appeals has suggested that an easement agreement—one establishing an easement that was used by an apartment’s tenants as a loading zone—was not impossible even though the City of Charlotte had since designated the easement a fire lane. The reason: the City might “at some point” determine that the easement no longer needed to be a fire lane.
Even if COVID-19 did destroy the subject matter of your contract, you’re not guaranteed any relief. It’s harsh, but true. Before courts will apply impossibility, they typically require a showing that the cause of the impossibility was not “reasonably foreseeable.” On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a pandemic. If you entered into a contract after March 11, the doctrine of impossibility probably is unavailable to you. It is possible that some courts may determine that a COVID-19 outbreak was reasonably foreseeable even before that. Like so many problems created by COVID-19, this is an untested question that will have to make its way through the court system before we have clear answers.
FRUSTRATION OF PURPOSE
So if you don’t have a force majeure clause, and impossibility gets you nowhere, then what? A third option is “frustration of purpose.” In North Carolina, the doctrine of “frustration of purpose” protects parties when performance under a contract remains possible, but some unforeseeable event destroys the contract’s value. See Brenner, 302 N.C. at 211.
Frustration of purpose is a high standard. Before courts will apply frustration of purpose, they require a showing that an unforeseeable event has totally undermined the value of a contract. It is not enough that an unforeseeable event may make performance under a contract either inconvenient or incredibly expensive. So just because the cost of holding an event during COVID-19 may have skyrocketed, those increased costs do not frustrate the purpose of your contract. Likewise, frustration of purpose does not apply when the parties have already allocated the risk of loss between themselves. For example, a frustration of purpose argument is unlikely to persuade a vendor to provide a refund if your contract includes “no refund” language.
Frustration of purpose still may provide some relief in the era of COVID-19. In particular, frustration of purpose is likely to apply to some service contracts. So, for example, if you had contracted with a catering company to provide services at your now-cancelled corporate retreat, you likely have no obligation to pay the catering company. That question is less clear when it comes to the location for that retreat. It is unsettled whether something like Governor Cooper’s executive orders, which limited large-scale gatherings, frustrated the purpose of your rental contract. Likewise, it is unclear whether the venue’s choice to reschedule your event at an unfavorable time will give rise to a winning frustration of purpose argument. Ultimately, the success of this argument may depend on how much the venue knew about your event.
In the face of COVID-19, the law is rapidly changing. This article provides insights based only on the law as it exists today. In a few months, once these theories have been tested, courts may change the scope of impossibility or frustration of purpose. While these insights offer a general lay of the land, remember that every case is fact specific. You should seek the advice of an attorney before determining your rights.
Chris is an appellate attorney and civil litigator in the Wilmington office of Ward and Smith, P.A. His multifaceted practice encompasses complex legal issues related to business, intellectual property, and appellate matters. As a civil litigator, Chris handles all aspects of commercial disputes involving contracts, non-compete clauses, trademarks, copyrights, and patents. A significant portion of his practice also involves critical motions and appeals.