Force Majeure and COVID-19: Can Contracting Parties Avoid Performance or Continue to Require it?
With the COVID-19 pandemic threatening people’s health and wreaking economic havoc in California and worldwide, parties to commercial contracts are asking whether force majeure and the closely related doctrines of commercial impracticability and frustration of purpose, can avoid or suspend their obligations in a contract.
As just one example, commercial and retail tenants have sought relief from their obligation to pay rent, given that many retail establishments like restaurants have been forced to close or have seen revenues plummet. Beyond leases, the COVID-19 crisis may affect performance of obligations under other commercial contracts (like loans or services or supply contracts), because cash flow and supply chains are disrupted, employees cannot come to a workplace, or government orders have required business closures.
Contracts Containing a Force Majeure Clause
As a first step, read through the contract and check whether it contains a force majeure clause. If it does, review its language closely. Force majeure generally requires two conditions to excuse performance: (a) the occurrence of unforeseen, extraordinary circumstances that create a risk that neither party has agreed to bear, and (b) the extraordinary circumstances were beyond the control of the party seeking to suspend or avoid performance. Contractual force majeure provisions typically list a series of events that the parties have agreed would excuse performance, including, as examples: a pandemic, epidemic, public health emergency, government action, or, more generally acts of God or events beyond the control of either party. In addition to listing particular triggering events, force majeure clauses typically state that performance is suspended for the duration of the event, and, in some cases, for a reasonable period beyond the event. Some force majeure provisions may require that the party invoking it provide notice to the other party, including advising of the expected duration that performance will be suspended.
Contracts Without Force Majeure Provisions
Even where a contract does not contain a force majeure provision, California law may excuse performance of a contract when extraordinary events not within the contemplation of the contracting parties, and beyond their control, make performance impossible or commercially impracticable. See, e.g., City of Vernon v. City of Los Angeles (1955) 45 Cal.2d 710. California Civil Code Section 1511 and the California Commercial Code Section 2615(a) reiterate these common law principles: The failure to perform or a delay in performance is excused when it is rendered impossible or impracticable by the occurrence or nonoccurrence of an event not within the contemplation of the parties and beyond their control, unless one of the parties explicitly agreed in the contract to assume the risk of such event.
Although force majeure and commercial impracticability are potentially viable defenses to performance of a contract, they are generally reserved for extraordinary situations. The current pandemic and government shelter-in-place measures may indeed be truly extraordinary, at least at the moment, for certain businesses and certain contracts entered into before the possibility of a COVID-19 event was reasonably anticipated. As time passes and the pandemic, government action, and government aid develop, however, the situation should change and become less exceptional.
Assuming that the current pandemic and government action would trigger a force majeure defense for contracts entered into, for example, before February 2020, the party seeking to avoid performance must still prove causation and is required to reasonably mitigate damages. Did the party invoking force majeure have other business problems before the pandemic that are causing or substantially contributing to the inability to perform? Has the party undertaken reasonable, diligent measures to mitigate the effect of the COVID-19 pandemic, such as redirecting its business efforts and minimizing costs? Moreover, why should the counter-party to the contract be forced to bear the risk of the pandemic?
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) signed into law on March 27, 2020 and other state enactments that may follow should also offer some contracting parties with sufficient relief and mitigation such that continued, or renewed, performance with pre-existing contracts may be required. The CARES Act provides hundreds of billions of dollars of funding available for Small Business Association loans, which will provide “forgiveness” (no repayment required) for amounts the businesses spend on interest payments for mortgages, payroll, utilities, and rent for an eight-week period after a loan originates. Government aid may enable businesses to mitigate their damages sufficiently that continued performance with contracts is required.
The full text of the CARES Act is available here and a thorough summary of both business and employment benefits under the act can be found here.
Issues for Consideration
- Review the contract for a force majeure provision and the particular contract language. Where the contract contains a specific provision, its language and the manner in which it allocates risks between the parties should take precedence over California’s common law and statutory law.
- If you are seeking to suspend or avoid performance, give the other party written notice, regardless of whether the contract requires it. If you are the counter-party seeking to require performance and you receive notice, ask reasonable questions – why in particular does COVID-19 justify suspending performance for this business, for how long, and what accommodations in lieu of suspending performance altogether could you (or the other party) propose?
- The party attempting to suspend or avoid performance needs to seek to mitigate damages. Likewise, the party seeking to enforce the contract should be flexible, where possible, both as a good business practice to further the relationship and to show that you were flexible or even proposed mitigation measures. Ask what you can do to facilitate performance, such as agreeing to delay or defer a payment for a certain period of time, or, possibly to waive or diminish interest payments or a late fee for a particular period. If litigation later ensues, a party’s flexibility should help to show that the party seeking to avoid performance could have found a way to perform with reasonable proposed accommodations or mitigation measures.
Aggressive litigants may also seek to take tactical advantage of the COVID-19 pandemic to avoid contracts they do not like. If you are faced with a baseless or overreaching claim that the COVID-19 pandemic has made contractual performance impossible, you may need to push back forcefully. And before you seek to take tactical advantage of the pandemic, keep in mind that courts are unlikely to look with sympathy on parties who try to exploit a worldwide health and financial crisis. Force majeure provisions should only be invoked where appropriate.
Any decision about whether to invoke force majeure or how to respond to a counter-party’s invocation of it is fact-specific. We expect to provide future updates on issues in specific contexts. For example, how will lenders and debtors address loan defaults if the pandemic triggers a long-term recession? How will commercial and residential landlords deal with sky-rocketing numbers of tenants who may suddenly be unable to pay rent?
For further information on how the COVID-19 pandemic might impact your contracts and your business, contact Howard Slavitt at hslavitt@coblentzlaw.com.