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CONTRACTS AND CORONAVIRUS: Is the Coronavirus a Valid Excuse for Missing a Contract or Lease Payment

CONTRACTS AND CORONAVIRUS: Is the Coronavirus a Valid Excuse for Missing a Contract or Lease Payment

CONTRACTS AND CORONAVIRUS: Is the Coronavirus a Valid Excuse for Missing a Contract or Lease Payment?

These are extraordinary and uncertain times. The one near certainty we have about the future is that it will take a long time to get back to business as usual. In the meantime, most businesses have had to severely curtail or completely shut down operations. To make matters worse, business owners can only guess when they will be able to reopen. All this has had a devastating effect on cash flow. As a business owner, chances are, you have contracts to fulfill and rent to pay. Or as a commercial landlord, you might be wondering if you’re going to get paid by your tenants. And if you do not, what can you do about it? Just because you don’t have money coming in does not mean your landlord, mortgage holder or customer will give you a free pass.

What to do? As nearly every lawyer will tell you, you need to start with the contract. The contract or lease is the instrument governing the rights and responsibilities of the parties. It’s not terribly helpful to tell a business owner that they should have foreseen such a possibility and incorporated provisions in their contracts allowing them to skip or defer payments until the situation improves. After all, very few people outside the sphere of epidemiology foresaw the distinct possibility and catastrophic effects of the current pandemic on the economy.

Many contracts will have what is known as a “force majeure” clause. Force majeure is a legal concept excusing non-performance, in whole or in part, for unanticipated events or events beyond the control of the party, sometimes referred to as Acts of God. It eliminates the need for foreseeability. It is important to remember, however, that force majeure is not a panacea. Typically, courts construe force majeure clauses strictly, meaning they do not liberally allow a party claiming force majeure off the hook.

So, what qualifies as a force majeure event? Usually, they are spelled out in the contract. They include events such as natural disasters, including hurricanes, tornadoes, floods and earthquakes. They also often include political unrest and strikes. One item not often found in the force majeure clause is pandemic or epidemic. That is why you must first check if the specific event is covered. If it is, make sure you follow the notice requirements, i.e. the instructions on how and when to inform your landlord, mortgage holder or customer of the force majeure event.

If the specific item is not listed in the clause, see if you can rely on the catch-all clause. Often, a force majeure clause includes language such as “or any event outside the reasonable control of the party affected.”

Whether the specific event is listed or you attempt to rely on the catch-all clause, keep in mind that the event must be the cause of your financial hardship. For example, if your restaurant was already on its deathbed, using the force majeure clause as an excuse not to pay rent might not work, particularly if you’ve already missed a payment or more. It’s also possible that a force majeure clause will carve out payment as an exception. In other words, payment is required even if other requirements of the contract cannot be fulfilled due to circumstances beyond your control

If your lease or contract does not contain a force majeure clause or you cannot rely on it for any reason, you will need to look outside of the lease or contract for help with non-payment.  The two main “extra-contractual” bases for non-performance are impracticability and frustration of purpose.

Impracticability is defined as follows: where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or circumstances indicate the contrary. The impracticability or interference with fulfilling the contract must not be the fault of the party claiming impracticability. This policy states the obvious, namely, you cannot cause the problem and then claim it as the reason you cannot fulfill the obligation.

One impediment to asserting the defense of impracticability is that economic hardship does not excuse performance. The distinction these days is that the pandemic is the likely cause of the economic hardship. So, will Pennsylvania courts view the concept differently under the circumstances? That remains to be seen.

The other extra-contractual basis for non-performance is frustration of purpose. The doctrine relies on three factors. First, the underlying event is not the fault of any party to the contract. Second, the event or circumstance occurs after the formation of the contract and was not foreseen by the parties. Finally, it becomes physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken initially. If these conditions are met, the contract will automatically terminate.

As the expression goes, “the devil is in the details.” Facts will matter and nuances can make all the difference. Before pushing the button on this nuclear option, you should consult with an attorney to determine the availability and viability of these defenses and whether they are appropriate for your business.

Please feel free to call my Philadelphia or Montgomery County offices at (215) 344-8343 for a consultation.