US:COVID-19: Contractual Obligations And Non-Performance
Apr 5, 2020 23:18:22 GMT 4
anenro likes this
Post by conflict on Apr 5, 2020 23:18:22 GMT 4
With much attention focused on the safe practices of social distancing, avoiding restaurants, bars and the cancellation of crowd-gathering events, you are no doubt thinking about the impact of COVID-19 on your business. If you are a restaurateur and have been asked or ordered to close – you are worried about paying the rent and paying staff with no revenue If you are a landlord, you may be asking can my tenant invoke a public emergency to suspend paying rent? What does my lease say? Do I have business interruption insurance? If so, do I file for coverage now or do I have to wait. If so, how long? Will the policy cover a pandemic or is it an exclusion? These and similar questions are being asked by businesses that rely heavily on foot traffic.
Many contracts, such as leases and construction contracts contain clauses intended to excuse performance due to events beyond a party’s control. Often these clauses are called “Force Majeure” clauses. The clause often defines an event or circumstance that may prevent a party’s non-performance without being in breach of contract. Such clauses usually appear near the end of the contract and are referred to as, “boiler plate”. Despite the “boiler plate” tagline, there is no uniform clause. If there is one in your contract, it likely varies greatly from others. Accordingly, there is no one size fits all response.
If the contract contains a Force Majeure clause, the clause must be analyzed to determine if the event causing the party’s non-performance is a covered event. If it is a listed event, non-performance should be suspended commensurate with the time of the Force Majeure event. Even if the event is not listed, many Force Majeure clauses contain broad, all-encompassing phrases, such as “Act of God” or “due to circumstances beyond a party’s reasonable control”. Such language may be asserted as a defense to excuse non-performance and being declared in default.
Several states, including Massachusetts, have generally found that “acts of God” do not excuse non-performance due to contagious disease (e.g. flu, diphtheria, smallpox),1 even in the event of a closure due to public health concerns, whether or not such closure is government-ordered (and, thus, beyond either party’s control)2. Governmental action could, however, constitute Force Majeure if specifically so identified in a Force Majeure clause. A common point in these cases is that the other party is still ready and willing to perform, and therefore performance has not been rendered impossible (notwithstanding that performance could theoretically be illegal due to the government-ordered closures). Thus, even though circumstances have made one party unable or unwilling to accommodate the other party’s performance, however prudent or necessary for the public good (or legally required), such inability or unwillingness to accommodate the other party’s impossibility of performance may be, may provide the old common law doctrine of impossibility of performance as a defense to performance.
In the foregoing cited cases, the non-performing party’s obligations are primarily payment obligations, whereas the obligations of the party that was ready and willing to perform in spite of the epidemic-related closures are primarily non-payment (provision of service) obligations. In a commercial/contractual relationship where both parties have significant non-payment (services or goods) obligations, the applicability of the “acts of God” doctrine may cause a different analysis. Nevertheless, depending on how the circumstances surrounding COVID-19 develop, there may yet be a narrow possibility in applying “acts of God” if governmental action continues to place further restrictions on individuals’ ability to travel, congregate, leave their homes, etc., thus making it truly impossible for both parties to perform, such circumstances would be distinguishable from those in the cases cited above.
What if there is no Force Majeure clause? All is not lost. As stated above, the common law provides defenses to non-performance including “impossibility of performance” and “frustration of purpose”. Asserting these defenses is dependent on the facts giving rise to the defense, and the Courts narrowly construe its application. An example of impossibility of performance would be the sale of a rare, vintage car accidentally destroyed prior to sale. Since it cannot be replaced, as would be the case if it were the sale of widgets, the seller is excused since it is impossible to perform. The assertion of this defense requires a thorough review of the facts, contractual terms and applicable state law.
There are many governmental authorities requiring closure of certain business operations. The Mayor of Boston, for example, ordered the suspension of all construction projects in the City. This will delay completing projects, likely allow the contractors to invoke suspension delay damage claims. Likewise, the delay in construction will cause delays in the sale or rental of units. The resulting cascade effect will impact many other businesses. How will the suspension of construction impact performance and contractual obligations of other parties, such as a tenant’s delay in moving into the new space. Will that cause the tenant to remain in possession of the existing space beyond the expiration date of its lease? If so, will that result in “holdover” rent charges being assessed by the landlord? Many such clauses call for double or triple rent and consequential damages should the landlord lose a prospective tenant due to holdover situation. Delays may cause the assessment of “liquidated damages” for failure to complete or perform on time. These and many other questions require the careful review of the contract and a thorough understanding of the law in the applicable state.
Footnotes
[1] The contracts in these cases do not contain a Force Majeure clause or otherwise specifically excuse nonperformance due to “acts of God”; however, the courts in these cases analyzed, among other things, whether contagious disease qualifies as an “act of God” that excuses nonperformance under general contract law principles.
[2] E.g., Libby v. Inhabitants of Douglas, 175 Mass. 128, 130, 55 N.E. 808, 809 (1900); Phelps v. Sch. Dist. No. 109, Wayne City., 302 Ill. 193, 195, 134 N.E. 312, 313 (1922); Bd. of Ed. of City of Hugo, Choctaw Cty. v. Couch, 1917 OK 42, 63 Okla. 65, 162 P. 485, 486; Smith v. Sch. Dist. No. 64 of Marion Cty., 89 Kan. 225, 131 P. 557, 558 (1913); McKay v. Barnett, 21 Utah 239, 60 P. 1100, 1102 (1900).
Many contracts, such as leases and construction contracts contain clauses intended to excuse performance due to events beyond a party’s control. Often these clauses are called “Force Majeure” clauses. The clause often defines an event or circumstance that may prevent a party’s non-performance without being in breach of contract. Such clauses usually appear near the end of the contract and are referred to as, “boiler plate”. Despite the “boiler plate” tagline, there is no uniform clause. If there is one in your contract, it likely varies greatly from others. Accordingly, there is no one size fits all response.
If the contract contains a Force Majeure clause, the clause must be analyzed to determine if the event causing the party’s non-performance is a covered event. If it is a listed event, non-performance should be suspended commensurate with the time of the Force Majeure event. Even if the event is not listed, many Force Majeure clauses contain broad, all-encompassing phrases, such as “Act of God” or “due to circumstances beyond a party’s reasonable control”. Such language may be asserted as a defense to excuse non-performance and being declared in default.
Several states, including Massachusetts, have generally found that “acts of God” do not excuse non-performance due to contagious disease (e.g. flu, diphtheria, smallpox),1 even in the event of a closure due to public health concerns, whether or not such closure is government-ordered (and, thus, beyond either party’s control)2. Governmental action could, however, constitute Force Majeure if specifically so identified in a Force Majeure clause. A common point in these cases is that the other party is still ready and willing to perform, and therefore performance has not been rendered impossible (notwithstanding that performance could theoretically be illegal due to the government-ordered closures). Thus, even though circumstances have made one party unable or unwilling to accommodate the other party’s performance, however prudent or necessary for the public good (or legally required), such inability or unwillingness to accommodate the other party’s impossibility of performance may be, may provide the old common law doctrine of impossibility of performance as a defense to performance.
In the foregoing cited cases, the non-performing party’s obligations are primarily payment obligations, whereas the obligations of the party that was ready and willing to perform in spite of the epidemic-related closures are primarily non-payment (provision of service) obligations. In a commercial/contractual relationship where both parties have significant non-payment (services or goods) obligations, the applicability of the “acts of God” doctrine may cause a different analysis. Nevertheless, depending on how the circumstances surrounding COVID-19 develop, there may yet be a narrow possibility in applying “acts of God” if governmental action continues to place further restrictions on individuals’ ability to travel, congregate, leave their homes, etc., thus making it truly impossible for both parties to perform, such circumstances would be distinguishable from those in the cases cited above.
What if there is no Force Majeure clause? All is not lost. As stated above, the common law provides defenses to non-performance including “impossibility of performance” and “frustration of purpose”. Asserting these defenses is dependent on the facts giving rise to the defense, and the Courts narrowly construe its application. An example of impossibility of performance would be the sale of a rare, vintage car accidentally destroyed prior to sale. Since it cannot be replaced, as would be the case if it were the sale of widgets, the seller is excused since it is impossible to perform. The assertion of this defense requires a thorough review of the facts, contractual terms and applicable state law.
There are many governmental authorities requiring closure of certain business operations. The Mayor of Boston, for example, ordered the suspension of all construction projects in the City. This will delay completing projects, likely allow the contractors to invoke suspension delay damage claims. Likewise, the delay in construction will cause delays in the sale or rental of units. The resulting cascade effect will impact many other businesses. How will the suspension of construction impact performance and contractual obligations of other parties, such as a tenant’s delay in moving into the new space. Will that cause the tenant to remain in possession of the existing space beyond the expiration date of its lease? If so, will that result in “holdover” rent charges being assessed by the landlord? Many such clauses call for double or triple rent and consequential damages should the landlord lose a prospective tenant due to holdover situation. Delays may cause the assessment of “liquidated damages” for failure to complete or perform on time. These and many other questions require the careful review of the contract and a thorough understanding of the law in the applicable state.
Footnotes
[1] The contracts in these cases do not contain a Force Majeure clause or otherwise specifically excuse nonperformance due to “acts of God”; however, the courts in these cases analyzed, among other things, whether contagious disease qualifies as an “act of God” that excuses nonperformance under general contract law principles.
[2] E.g., Libby v. Inhabitants of Douglas, 175 Mass. 128, 130, 55 N.E. 808, 809 (1900); Phelps v. Sch. Dist. No. 109, Wayne City., 302 Ill. 193, 195, 134 N.E. 312, 313 (1922); Bd. of Ed. of City of Hugo, Choctaw Cty. v. Couch, 1917 OK 42, 63 Okla. 65, 162 P. 485, 486; Smith v. Sch. Dist. No. 64 of Marion Cty., 89 Kan. 225, 131 P. 557, 558 (1913); McKay v. Barnett, 21 Utah 239, 60 P. 1100, 1102 (1900).