The COVID-19 pandemic is disrupting all facets of the world economy. As we continue to navigate these challenging times, legal issues are beginning to materialize.
In the commercial real estate and management world, the common question that the attorneys at Fetherston Edmonds, LLP are being asked is “what do I do if a party I have entered into a contract with cannot fulfill its obligations?” Common examples are tenants unable to pay rent, suppliers who are unable to pay for materials and supplies, or parties who simply cannot perform the terms of the contract at all.
Reviewing your contract terms may offer you some guidance. A common provision in most contracts is a Force Majeure Clause. This provision is often found in the later half of contracts or leases. It is also generally known as the “Acts of God” provision. This contractual provision lists certain events that are beyond either parties’ control and would excuse future performance. Common examples are war, serious weather or natural events, strikes, or state or federal government order.
If you are currently experiencing business difficulties and are not able to operate your business as normal, there may be temporary or permanent relief available. First, check to see if your contract has such a provision. If it does, read it carefully to see if will apply to your situation. Some of these clauses are worded very narrowly, so read it carefully.
If you have a Force Majeure Clause and it applies, the next step of the analysis is whether the contractual obligations are terminated altogether, or if they are just postponed. For example, some clauses in commercial leases may include a prescribed remedy such as, specifying, if a triggering event has occurred, then the rent or other obligations under the lease are forgiven until the event ends. Once the event has ended, the time period is then added to the end of the lease. So, in this example, if the current COVID-19 Pandemic lasts six months, then the tenant could in theory not have to pay rent for six months. However, those six months would be added to the end of the lease.
In the current pandemic, whether a Force Majeure Clause applies needs to be determined on a case-by-case basis. An example of what would qualify under a commonly drafted Force Majeure Clause is business impacted by state ordered shutdowns. In the State of Oregon, Governor Kate Brown has issued several Executive Orders. Executive Order 20-12 ordered the shut down of all nonessential businesses. The businesses ordered to shut down included amusement parks, gyms, furniture store, hair salons, and movie theaters. If you own or operate one of these specific businesses, then the Force Majeure Clause would most likely apply and excuse performance while the Executive Order is in effect.
If the language or situation is unclear, know that case law is sparse and few court cases exist interpreting or enforcing Force Majeure Clauses. However, the cases that are out there generally interpret the clauses very narrowly meaning if the event is not listed, then the clause will not apply.
Questions still remain about contracts without Force Majeure Clauses or Clauses that are drafted narrowly to circumvent the current situation. In these circumstances, most states and federal common law have a general defense of impossibility, impracticabilty, and/or frustration of purpose to performing. These are generally affirmative defenses to a breach of contract claim. The courts have commonly required a party asserting this defense to prove that it has exhausted all other alternatives.
To summarize, if you have an obligation you cannot perform or have a party on the other side of a transaction who is asking for relief, take the following steps:
1. Review your contract;
2. If you have a Force Majeure Clause, read it carefully to see if it applies and falls under the listed events;
3. If there are any questions, obtain legal advice;
4. If the Force Majeure Clause does apply, give the other party timely notice – do not wait; and
5. After providing notice, work with the party to come to a mutually agreeable timeline or resolution. Work together to determine if the contract be terminated (e.g., cancelling the order of supplies) or will it just be postponed to a later date.