Pandemics and Contractual Performance: Force Who?

Posted on by David V. DuVal, Marieke van Rijn in Corporate and Business

Measures put in place by federal, state and local governing authorities to prevent the spread of Coronavirus (COVID-19) have wreaked havoc on almost all aspects of our daily lives. In the business world the disruptions are widespread, including a major disruption to the ability of individuals and businesses to meet their contractual obligations. Government office closures, postponement of public hearings, court closures, mandated closure of businesses and shelter-in-place orders are just some of the issues creating unexpected and unforeseen delays in the timely performance of contractual obligations. Prior to taking any action to excuse or delay performance of a contractual obligation due to COVID-19 pandemic, individuals and businesses should review their contracts to determine if a "Force Majeure" clause is included in the document, and if so, if that language includes or can be interpreted to include a national emergency such as the ongoing pandemic. Without such a clause, the party delayed or prevented from timely performing their contractual obligations may have to look to some of the common law doctrines for help in avoiding a default under the contract.

Force Majeure Meaning; Negotiating the Terms
Force majeure provisions are included in contracts to protect parties from liability if events which are beyond their reasonable control prevent or delay the party's required action. Unlike other clauses in contracts, there is no single recognized definition or standard interpretation of what is considered a force majeure event. As a result, it is important to draft these provisions as broad as possible to cover as many types of events as possible and to negotiate this provision during the contract preparation as opposed to accepting a boilerplate contract provision. Some commonly used examples are strikes, lockouts, labor troubles, failure of power, riots, insurrection, war, flood, acts of God and acts of terrorism. In addition, there are some more specific examples which one should consider utilizing which relate to the area in which performance is required, such as a hurricane of a certain magnitude or prolonged winter weather conditions. Further, a catch all general provision such as "or other reasons of a like nature beyond the reasonable control of the party delayed" can be utilized to cover unexpected or unforeseen events such as the current COVID-19 Pandemic. Because there is no generally accepted definition of what constitutes a force majeure event, courts reviewing a contract dispute would look to what is explicitly stated in the contract. If the force majeure provision does not cover the encountered event, then avoiding or delaying a contract obligation due to such cause may not be permitted.

Force Majeure and COVID-19
If your contract has a force majeure clause that includes pandemics or a general catch all phrase as referenced in the proceeding paragraph, then you may be able to delay your contractual obligation if you are not able to meet such obligation due to the pandemic. It is important to remember that a party cannot have protection under a force majeure clause unless the obligation would have been met if not for the force majeure event. For example, if a retail tenant were late on filing for a building permit prior to the pandemic, that tenant could not then claim protection under the force majeure clause of their lease for such default. In contrast, if the retail tenant closed due to a government mandated shelter-in-place order that tenant could claim they were not in violation of the lease provisions prohibiting "going dark" due to force majeure. It is also important to note in the review of any agreement, that there may be specific carveouts which are not subject to force majeure delays, such as financial obligations including the payment of rent or loan payments.

It is essential to review any notice periods which are required to be adhered to prior to invoking protection due to force majeure and what rights or remedies may be triggered for the other party. In many cases, the other party may have the remedy of terminating the contract in the event the obligation is not met within a certain amount of time. Claiming protection under a force majeure clause is a short-term solution and the long-term consequences must be considered.

Other considerations
Force majeure and the protection it affords will not be implied into any contract. If your contract does not contain such a clause, common law doctrines of impossibility, frustration of purpose, or impracticability may apply. The threshold for a court to apply these doctrines is much higher to meet. Rather than simply looking to the contract and determining if the force majeure clause applies, the party seeking excuse from the contractual obligation will need to prove to the court that their performance would be impossible, or the purpose of the contract has been undermined by the force majeure event. The contract being more difficult or expensive to perform due to COVID-19 likely will not be sufficient to meet the threshold for a court to excuse performance.

Going forward, parties should consider amending their agreements to include coverage of events caused by pandemics. Parties should also confirm if they have business interruption insurance coverage in these circumstances, and if not, if they can bear the cost of purchasing such insurance.

About the Authors

David V. DuVal focuses his practice on all areas of commercial real estate with a particular focus on the representation of national retailers in the acquisition and leasing of store locations throughout the United States.

Marieke van Rijn practice focuses on commercial real estate and business transactions. Marieke assists clients in reviewing, drafting, and negotiating letters of intent, leases, purchase agreements, and easement agreements, for acquisition, leasing, and solar development transactions, as well as assisting clients with due diligence matters related to those transactions, including analysis of title and survey.

Spotts Fain publications are provided as an educational service and are not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.