With much attention focused on the safe practices of social distancing, avoiding restaurants and 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. These provisions describe events or circumstances that may excuse a party’s non-performance without being in breach of contract. Such clauses usually appear near the end of the contract and are considered “boiler plate.” Despite the “boiler plate” characterization, force majeure provisions are not uniform. If there is one in your contract, it may varies greatly from others. Accordingly, there is no one size fits all response to whether a particular event constitutes force majeure.
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 duration of the force majeure event. Even if the event is not listed, many force majeure clauses contain broad 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 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 therefore beyond either party’s control[2]. “Governmental action” may constitute a force majeure event, excusing performance, if governmental action is expressly included in a force majeure clause.
A common claim in litigated force majeure cases is that the other party is 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. In the cases cited in footnote 2, the non-performing party’s obligations were primarily payment obligations, and the obligations of the party that was ready and willing to perform in spite of the epidemic-related closures were primarily non-payment, provision of service obligations. In a commercial contractual relationship where both parties have significant non-payment obligations, typically, the provision of goods or services, performance may be excused as an “act of God” force majeure event.
What if there is no force majeure clause? All may not be lost. Common contract law provides for certain defenses to claims of non-performance, including “impossibility of performance” and “frustration of purpose.” 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’s non-performance may be excused, since it is impossible to perform. The assertion of this defense requires a thorough review of the facts, contractual terms, and state law.
Many governmental authorities have required 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 and may enable the contractors to invoke suspension delay damage claims. Likewise, the delay in construction may 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 contract law of the state in which the project is located or in “applicable law” provision of the contract.
[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).