Covid-19

Even though this doctrine exists, its specific application to a small business depends on the wording in the contract and the state and/or federal law that applies to the contract.  If a force majeure clause exists in the contract, then make sure to review it carefully and comply with it strictly.  It is best to review the entire contract, and not just the force majeure clause itself, because many times, other contractual provisions modify or elaborate on the the force majeure clause.  

If a force majeure clause is not specifically identified in the contract, then the concept may still be included in other parts of the contract; and look to the contract’s applicable law to decide whether impossibility or impracticability can be the basis to excuse performance of a contract.

1. Does the force majeure clause cover the event?  Some force majeure clauses specifically reference pandemics, epidemics, and governmental orders as specific events that qualify as force majeure events, thereby allowing a party to invoke the force majeure clause to excuse its performance under the contract; and others have catch-all language like “other acts of God” or “events beyond the reasonable control of a party”.  If the clause specifically identifies pandemic, epidemic or governmental orders, then the argument is fairly straight forward (as it relates to COVID-19) to allow the affected party to be excused from performance.  If the clause does not list these specific events, then look to the contract’s governing law (which is usually a separate clause that identifies which state’s or federal law applies) for the interpretation and enforcement of the contract.  Cases, statutes or regulation in that jurisdiction may be helpful in determining whether COVID-19 (or any other event really) has been determined to qualify as a force majeure event.
   
2. Is there a notice requirement to invoke the force majeure clause?  As stated above, strict compliance with the force majeure clause is important.  Many force majeure clauses have a notice requirement, and the party invoking force majeure must comply with it in order for the clause to be invoked.  There is usually a time component in the notice.  For example, the clause may require prompt written notice by the invoking party or notice within a certain number of days of having knowledge of the force majeure event.  Failure to meet the timing component can prevent a party from invoking the force majeure clause, so small businesses should be proactive and review its contracts to understand these requirements. 
   
3. Is there a time limit on how long a party can be excused from performance?  Many force majeure clauses contain a time limit on how long a party’s performance may be excused.  For example, a party is excused from performance for only a certain number of days.  If there is such a time limit, then the invoking party will have to figure out what happens when the time period expires?  Can it get an extension? 
   
4. Is the obligation to make payments under the contract expressly excluded as an excuse even if there is a force majeure event?  Some contracts contain a statement that the obligation to pay is not excused due to a force majeure event.  Thus, even if there is a force majeure event, a party cannot rely on it to avoid making payments under the contract. 
   
5. Even if force majeure applies, is the invoking party required to comply with other obligations?  If force majeure applies, is the invoking party required to mitigate the impact of the force majeure event on its ability to perform?  If so, then to take advantage of continued excuse from performance or to avoid default liability, the invoking party must comply with this requirement. 
6. Can the parties negotiate and agree to a course of action regardless of what the contract states?   Regardless of what the contract states, the parties can always mutually agree on a course of action.  After a good understanding of its rights and obligations under the contract, a small business can always negotiate with the counter party on a course of action that best suits them.    

Small businesses need to be proactive, understand its contracts, and plan accordingly to navigate these uncertain times.  The discussion above is intended to help analyze a small business’ options, but other actions and considerations may still be needed.  Seek good advice, as other issues include what sort of remedies a counter party has under the contract, what happens if a lawsuit is filed, etc., to help plan accordingly.   

Contractual Obligations During COVID-19:  Material Agreements and Commercial Leases

I suggest thinking about and doing the following.  I don’t suggest just breaching your agreement (like not paying rent or making a delivery) without first considering these items.  Because contractual obligations are enforceable, the other (non-breaching) party has the right to sue for damages; and with statutes of limitations extending as long as four years in some cases, the other party doesn’t have to bring suit right away to exercise its rights.  

With a plan and proposal, the parties may agree to just suspend all obligations under the agreement all together; but without a plan, proposal and communication, this will be hard to accomplish.  Communication and making a well-developed proposal show good will, which goes a long way during these unpredictable times. 
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1. Understand Your Contractual Rights and Obligations:  Before you can develop a plan, you must understand your rights and obligations under the particular contract.  Using the commercial lease as an example for discussion, is there a force majeure provision that excuses performance?  Usually, commercial leases (and most other agreements) will include a provision (force majeure) that excuses the parties from performance of their obligations when certain events are beyond their reasonable control – the typical ones are war, terrorist events, and acts of god (like hurricanes, tornadoes, etc.).  However, every contract is different, so review your contract and seek advice on what it says. Does COVID-19 or governmental orders qualify as force majeure under your agreement? It may be that the obligation for rental payments is specifically excluded from the force majeure provision or the provision doesn’t contemplate pandemics or governmental orders as an excuse.  On the landlord’s side, are their obligations to maintain the premises, provide access to the premises, keep the premises clean and safe, etc. These obligations may all be impacted by COVID-19 or governmental orders; and failure to perform them may allow the tenant to declare a default. If that’s the case, then perhaps it may be better to work with the tenant than enforcing payment or other obligations against the tenant.
   
2. Seek Input and Advice:  Work with your advisor, broker, attorney, and CPA to collect ideas, suggestions and advice about your particular situation in light of the particular contract.  These professionals understand your business and may have negotiated your particular contract. Additionally, they may have helped clients in similar situations, and can bring their breadth of experience to advocate your position.  They can dive deeper into the contract to look for exceptions, exclusions, loopholes, and other provisions that can support your position while developing a plan. 
   
3. The Plan/Proposal:  In developing the plan or proposal, keep in mind that the party on the other side has contractual obligations of their own.  How will your inability to perform affect them – landlords for instance have payment obligations to their lenders but must also meet certain financial and operational covenants?  Can performance be delayed? What are the true underlying reasons for non-performance – like inability to get materials or supplies, workers not able to come to work, customers have cancelled orders, etc.?  What’s the remaining term of the agreement – if it’s short enough, perhaps the parties can mutually agree to just terminate the agreement? In the context of a commercial lease, landlords have to make mortgage payments, meet other contractual obligations for the building, and pay employees too.  Perhaps your plan includes asking if they have received deferments from their lenders, which means they should be more willing to defer rental payments. If the landlord has to clean and maintain the premises, perhaps agreeing to take on that obligation can be exchanged for reduced rent for a certain period of time.  How can the agreement be restructured? The key here is to use the contractual provisions as levers that can be pulled to come to a mutually acceptable plan going forward – get creative and understand what the other side’s obligations to you and other third parties may be. Mutual agreement (vs. unilateral action or default) removes the prospects of breach and potential litigation down the line and shifts them to an understanding for a path forward that can then be memorialized in writing.   
   

Although these are uncertain times, and some business decisions have to be made quickly, it’s worth it to take a bit of time to understand your rights and obligations and to come up with a plan.  When normal business starts to resume, the relationship between parties will continue to be supported by these good-will and productive efforts. And if the final decision is to breach an agreement, at least it’ll be an informed decision.