Soldiers from Fort Riley, Kansas, ill with Spanish flu at a hospital ward at Camp Funston in 1918.

In light of the unprecedented scope and severity of the novel coronavirus (COVID-19), governments and private entities across the globe are undertaking a variety of dramatic steps intended to halt the spread of the disease. These drastic changes have left businesses scrambling to manage compliance risk and to confront the realities of a dramatically altered economic environment.

Among other things, the pandemic's rapid spread has had a significant impact on the economic viability of a variety of long-term contractual arrangements and has left many businesses struggling to determine whether the impact of coronavirus suffices to excuse contractual performance. There are no simple solutions. Rather, the precise language of the contract at issue, along with applicable state law, is likely to dictate the risk of non-performance under present circumstances.  

Setting these considerations aside, however, a historical parallel exists that potentially sheds light on the approach courts may adopt when interpreting contracts in light of an epidemic: the Spanish flu.

From 1918 to 1920, an epidemic of Spanish flu infected about a quarter of the world's population, killing tens of millions, including approximately 675,000 Americans. While the full scope of this outbreak has faded from public consciousness and is now largely overshadowed by the effects of World War I, the Spanish flu outbreak was devastating and marked perhaps the first truly global pandemic illness.  

Like the current coronavirus outbreak, the Spanish flu also confronted businesses, individuals, and governmental entities across the world with quarantines and other disruptions, heightening the cost and difficulty of contractual compliance. Given these challenges, courts in this era struggled to balance the unexpected impact of the virus with the strict approach to contract performance enshrined by the common law.  

While not a perfect analogue to present circumstances, the common law decisions from this era demonstrate the risk and uncertainty in asking courts to excuse performance, even under the most demanding of circumstances.

Unsurprisingly, the common law approach to contractual enforcement was notably harsh. As one New York court put it: "[I]f what [was] agreed to be done [was] possible and lawful the obligation or performance must be met.  Difficulty or improbability of accomplishing the stipulated undertaking will not avail the obligor."  

In line with this harsh approach, courts during the early part of the twentieth century were loath to excuse contractual compliance no matter how severe the circumstances.  For example, in Phelps v. School District No. 109, the Supreme Court of Illinois rejected a school board's attempt to avoid paying a teacher's salary after local schools were closed as a result of a Spanish flu outbreak.  The court explained that a school closure for public health reasons was not an "act of God . . . [but instead] was one of the contingencies which might have been provided against by the contract, but was not."  Accordingly, the court determined that the school board should bear the loss for the unforeseen contingency of the pandemic and was required to meet its "unconditional" obligation of paying the teacher's salary during the closure.  

Decisions from other courts are in accord; even when government regulation affected performance, performance was still required so long as the regulation did not render such performance literally illegal.       

Still, depending on the terms of the contract issue, courts did sometimes find that disruptions caused by Spanish flu sufficed to suspend performance, at least temporarily.  Indeed, in some cases, courts went so far as to specify that a pandemic sufficed to warrant setting aside a contract assuming that a party was rendered unable "to give or receive performance."   

For example, in contrast to the Illinois decision discussed above, an Indiana appellate court excused a school from paying teacher salaries when a board of health official ordered school closures in response to the Spanish flu.  The court explained that the board's order rendered performance impossible and, accordingly, "there could be no recovery for such time." Separately, a California appellate court ruled that a production slow-down based on a Spanish flu-related quarantine excused a delay in shipment because the terms of the contract authorized a delay, and appropriate notice was given to comply with contractual terms.

 As reflected above, the fact that a global pandemic was almost certainly unforeseen by the contracting parties is not necessarily an acceptable excuse for breach. Nor is the fact that the effects of a pandemic are likely to include burdensome government regulation and a substantially increased cost of performance. Instead, setting aside doctrinal variance in state law, courts are likely to precisely analyze the contours of agreed contractual obligations and whether those obligations were, in fact, rendered impossible to satisfy based on changed circumstances. 

While performance was not often excused, decisions related to the Spanish flu illustrate that courts have, at least at times, been willing to recognize the monumental impact of an epidemic as an excuse for contractual performance.  As in all contract disputes, the language of the contract at issue plays a significant role in resolving any legal dispute, but, given the unprecedented nature of the coronavirus, a more creative approach is called for. The common law, while rigorous, provides another set of critical considerations when considering the costs and opportunities of non-performance.

Yvette Ostolaza is the managing partner of Sidley Austin's Dallas office, a member of the firm's management and executive committees, and co-head of Sidley's global litigation practice. Ms. Ostolaza can be reached at [email protected].  Daniel Driscoll and Tayler Green are Dallas associates in Sidley Austin's complex litigation and disputes practice.