The world is still grappling with the COVID-19 Pandemic. In the United States, most experts believe that we are just starting to deal with the spread of the Delta variant and that we may be dealing with it for months to come. As businesses watch and wait to learn what steps may be taken to curb the spread, let’s reflect on what happened last year and learn how the force majeure provision in some contracts and agreements may protect businesses.
How the pandemic impacts business
In 2020, federal, state and local governments imposed significant restrictions on individuals and businesses. Restaurants, bars, spas, health clubs and nightclubs were particularly hard hit with some of the most restrictive rules imposed on their operation in an effort to curb the spread of the virus.
In Washington, DC, restaurants and bars could continue to provide carry out and delivery, but that is only a tiny part of the revenue stream for most D.C. restaurants. Restrictions on businesses create an incomparable hardship, making it difficult to pay bills, and unfortunately for some, to even continue as a going-concern. These restrictions need not be imposed for a long time before the negative economic effects become irreversible.
Understanding your lease agreement in light of COVID-19
For many of these service establishments, their biggest expense is the lease, but there may be other period contracts that are or will soon become difficult or impossible to pay. Businesses will be curious about whether they can be excused from performing or paying during the national state of emergency caused by the pandemic.
Although the particular advice your business receives will vary on your particular circumstances, there are a few things to consider when determining whether you will have an excuse or defense to what would ordinarily be a breach of contract.
Find out if your lease has a force majeure provision
The first place to look in order to determine your rights and obligations and any recourse you may have under these circumstances is the agreement itself. Look to the plain meaning of the contract. Some agreements will have so-called force majeure provisions that will outline circumstances under which some or all obligations outlined in the agreement will be excused. The term’s inclusion is not a panacea, however. Its inclusion in the agreement does not definitively mean that performance will be excused.
How the court evaluates force majeure
The court that decides the matter will look to the language of the contract and determine the intent of the parties. Sometimes, the language can be plain and the circumstances can be obvious, but most other times it is not. In such a case, the court will use its rules toolbox of contract interpretation to reach a conclusion; custom is one such tool.
As an illustration of the complexity involved, let’s consider a D.C. bar that has a force majeure provision in its lease that states it is excused from payment in case the restaurant is no longer operating through no fault of its own. Most D.C. bars were not completely shut down last year – offering take-out and delivery of both food and alcohol in an effort to remain financially afloat, which they may have never envisioned doing. Does this constitute a force majeure event? Even when parties agree to language in a force majeure provision in a lease, this scenario illustrates how the matter is far from straightforward.
What to do if your commercial lease does not have a force majeure provision
Some commercial leases will not contain a force majeure provision. And in my experience, even those that do typically exempt the rent obligation from the list of excusable obligations. In that case, there are two other legal doctrines worthy of discussion: frustration of purpose and commercial impracticability.
The frustration of purpose defense
Frustration of purpose is when a party’s principal purpose for making a contract is substantially frustrated through no fault of its own by the occurrence of an event the non-occurrence of which was a basic assumption of the parties. Under this doctrine, the party asserting the defense could conceivably still perform (in our scenario, pay the rent), but the reason for doing so no longer exists. The burden to prove frustration of purpose is on the party seeking to assert such a defense. The frustration must be so severe that it could not fairly be regarded as within the set of risks contemplated under the contract.
The bar owner may argue that the pandemic and the consequent state of emergency, which includes a significant shutdown of operations, was unforeseen and not possibly envisioned when entering the contract with the landlord, that a shutdown of this severity and duration frustrates the purpose of the lease. If the bar cannot serve customers on its premises the bar owner may have a valid argument. The landlord may argue that the occurrence of the state of emergency and ensuing restrictions on operations did form the basis of the agreement, that it was incumbent on the bar owner to consider this risk, and he or she just failed to do so. The landlord may also argue that the frustration may not be so severe if the establishment still has cash flow from take-out and delivery orders. Who is right depends on the court’s consideration of the law when applied to the facts, but these are difficult questions for anyone to answer.
The commercial impracticability defense
Commercial impracticability refers to the scenario in which there is an unexpected event that the parties did not consider, the risk of which was not allocated to any one party and which renders performance commercially impracticable or impossible. The court must find that all three elements are met for the defense to succeed. This would mean that the bar owner and the landlord in our hypothetical did not consider this event happening, no one assumed the risk of the event happening by agreement or by custom, and payment of the rent is commercially impracticable now because, for example, there is no revenue to pay the rent.
These legal situations, like the current state of affairs, are complex. The purpose of this blog entry is to simply introduce readers to legal theories that have offered excuses to performance in past, albeit rare, cases. Whether you or your business should assert these defenses or make these arguments will rest on the facts of your situation and your specific jurisdiction’s laws. It is nevertheless important to know that courts have on occasion excused obligations because of circumstances not contemplated by and outside the control of the parties. Not only should business owners be aware in case of potential lawsuits, but because it could provide greater negotiating power as well.
If you would like to understand your rights and obligations in light of current events, set up a consultation with Jabaly Law. A seasoned contract attorney can help you review your contracts and agreements and understand your options.
