Legal Issues Involving The Coronavirus

The COVID-19 pandemic, also known as the Coronavirus pandemic, has severely affected individuals and businesses everyday.  The global economy has completely shut down. People and businesses are not making money to pay their bills. People and businesses more and more are attempting to excuse their contractual nonperformance through either force majeure provisions or other legal mechanisms.  These legal issues will affect real estate agreements, lease agreements, business contracts, sales contracts, and all other obligations.  This article will discuss the legal issues.   

In addition, many businesses have filed insurance claims for loss in business.  Unfortunately, there are many claims being denied by the insurance carrier. If this is the case, it is best to contact an attorney to discuss how to appeal the denials.    

What Does Force Majeure Mean?

“Force Majeure” is a phrase that translates from French as a “superior force”.  It is also a phrase that signifies an “Act of God.” Force majeure is a provision that is included in contracts.  A force majeure clause is a contractual clause which exempts one or both parties from performing their obligations pursuant to the agreement.  People can be freed or excused from their contractual promises because of an event that is out of their control – an “Act of God.” This type of excuse of performance arises from circumstances beyond either parties’ control. Force majeure makes performance of the contract either impractical or impossible. This is a high standard to satisfy.  The Court’s underlying policy is to hold people to their promises and to allow contractually bound parties to receive the benefit of their bargain.    

To enforce the force majeure provision, a party may file a pleading with the Court for an order.  The Court will consider the following factors: (1) Is the event specifically identified as force majeure in the written contract; (2) was this risk foreseeable or could it be mitigated; and (3) the performance is truly impossible as result of the event. The actions to mitigate the risk will be closely scrutinized by the Court. Moreover, the enforceability of a force majeure clause will be rejected by the Court if the performance is merely impracticable or economically difficult rather than truly impossible

The types of events that are included in force majeure provisions normally include:

  1. Acts of god which are extreme acts of nature or weather events such as floods, fires, earthquakes, hurricanes, or explosions;
  2. War, any acts of terrorism, quarantine, and epidemics;
  3. Acts of governmental authorization such as requisition, criticism, and changes in laws and regulations;
  4. Strikes and labor disagreements;
  5. Certain types of extreme unexpected accidents.

What Is An Act of God?

Some contracts have specific written stipulations that outline “Acts of God”. Normally, Acts of God are defined as: “an extraordinary interruption by a natural cause (such as a flood or earthquake) of the usual course of events that experience, prescience, or care cannot reasonably foresee or prevent.”

Acts of God are important because it can limit the business entity’s damages during an event out of their control. However, there are some limitations especially if the defendant was aware of an issue and did not properly disclose that information.

The coronavirus pandemic will be a case of first impression.  That is, the courts have never dealt with this type of situation.  

According to a California court decision, in order to constitute an Act of God, a storm must be so unusual in its proportions that it could not be anticipated by a defendant. Inyo Chemical Co. v. City of Los Angeles (1936) 5 Cal.2d 525, 532–535, 55 P.2d 850; Clarke v. Michals (1970) 4 Cal. App. 3d 364. 

Is The Coronavirus An Act Of God?

The coronavirus (COVID-19) pandemic has severely impacted the ability of individuals and businesses around the globe to maintain operations and satisfy their existing contractual obligations.  

The World Health Organization classified COVID-19’s as a “pandemic”. Therefore, a force majeure clause will be triggered if the clause expressly includes “pandemics.”  In addition, a force majeure clause may also include express language stating that performance is excused if governmental orders or regulations make performance impossible.  The Federal Government has issued many orders concerning the Coronavirus such as travel bans and stay at home orders. If the performance of the contract is interrupted due to the government orders, then the force majeure provision may be enforced.     

However, if “pandemic” or “government orders” were not expressly provided for in the written contract, then the Court will not automatically enforce the force majeure clause. If the contract does not include specific references, according to past precedent the Courts may not permit the excuse of performance.  This means that businesses and individuals will still be obligated to pay debts, rents, and other contractual liabilities. 

Time will tell if Courts liberalize the interpretation of force majeure clauses to accommodate for the current impossible market realities caused by the Coronavirus pandemic.  In support of this view is the fact that the Federal Government has imposed restrictions on travel, movement, and gatherings. Nearly all industries in the world have been shut down completely.    

The parties seeking to invoke the force majeure provision will still need to prove to the Court that the pandemic was unforeseeable, that they took steps to mitigate any losses, and that it is truly impossible to perform.  

Mitigation steps may include good faith efforts to renegotiate or enter into a compromise agreement.  The party’s good faith conduct is critical to obtaining a favorable order by the Court. It is extremely important to document all reasonable steps taken to mitigate the losses.          

What If The Coronavirus Is Not Considered An Act Of God?

It may be argued that the national emergency caused by the Coronavirus pandemic does not have to be considered an “act of God”.  There is legal support to argue that the national emergency could not have been prevented by any party to the contract such that the performance of contract is excused.  

California courts have specified that force majeure is not limited to an “Act of God”.  The Court states: “The test is whether under the particular circumstances there was such an insuperable interference occurring without the party’s intervention as could not have been prevented by the exercise of prudence, diligence and care.” Pacific Vegetable Oil Corp. v. C. S. T., Ltd., 29 Cal. 2d 228, 238 (1946). And where “human agency” also plays a role in proximately causing harm, liability may also result. Dufour v. Henry J. Kaiser Co., 215 Cal. App. 2d 26, 29 Cal. Rptr. 871(1963)

Moreover, California Civil Code section 1511 (also see California Commercial Code section 2613) specifies what excuses performance. The code states: 

The want of performance of an obligation, or of an offer of performance, in whole or in part, or any delay therein, is excused by the following causes, to the extent to which they operate:

  1. When such performance or offer is prevented or delayed by the act of the creditor, or by the operation of law, even though there may have been a stipulation that this shall not be an excuse; however, the parties may expressly require in a contract that the party relying on the provisions of this paragraph give written notice to the other party or parties, within a reasonable time after the occurrence of the event excusing performance, of an intention to claim an extension of time or of an intention to bring suit or of any other similar or related intent, provided the requirement of such notice is reasonable and just;
  2. When it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary;

What If My Contract Does Not Have A Force Majeure Clause?

If a contract does not have a force majeure clause, other options may be available such as common law defenses of (1) impossibility, (2) impracticability, or (3) frustration of purpose.  These are alternative common law mechanisms for excuse of nonperformance.    

Impossibility & Impracticability

Impossibility means that there was no possible way for a party to perform contractual duties. Impracticability means that a duty to be performed has become unachievable or too expensive to perform.  These legal doctrines may excuse nonperformance where it is objectively established that: (1) the Coronavirus pandemic was an unexpected intervening event; (2) the parties’ agreement assumed such an event would not occur; and (3) the Coronavirus pandemic made contractual performance impossible or impracticable. 

Furthermore, the Uniform Commercial Code (UCC) provides the standards for governing contracts that involve the sale of goods.  Most state laws follow the Uniform Commercial Code. Pursuant to the Uniform Commercial Code, a seller is exempt from performing under a contract when its performance has been made impracticable. According to Uniform Commercial Code section 2-615, a seller is not in breach of its duty “if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”

Frustration Of Purpose

Another common law defense is “frustration of purpose”. The purpose of a contract is “frustrated” when a change in circumstances causes a party’s performance practically worthless to the other party. For example, if a commercial tenant who entered into a lease is no longer able to operate their business, due to the lockdowns put in place nationwide, then frustration of purpose may be argued.  Generally, economic hardship is usually not enough to assert a frustration of purpose. However, it could be argued that under the current circumstances, an extreme economic hardship has frustrated the purpose of the contract and has created an impossibility for the business to continue with its obligations. 

Two impediments to applying the defense of “frustration of purpose” include: (1) The Courts may determine that there is insufficient evidence that an event prevented a party from fulfilling the agreement, and (2) the “frustration” must be near complete, thereby making the business now unprofitable. 

Will A Court Excuse The Non-Performance Of A Contract Due To The Coronavirus?

Businesses are unable to operate because the United States declared a national state of emergency. Lockdowns have been implemented and businesses under contracts are unable to perform under their contracts.

If the contract specifies “pandemics”, “epidemics”, or impossibility as a result of “government laws or regulations” within the express language of the written force majeure clause, the Courts will likely excuse the nonperformance of a contract.  

However, if the contract is silent on these matters, common law arguments may be applied.  Each jurisdiction applies the common law doctrines differently. For example, California is somewhat favorable.  California will excuse performance where it is impracticable, such that it would require excessive or unreasonable expense. Whereas, New York has a strict application.  For example, New York will only excuse performance if it was truly impossible rather than merely impracticable.  

Ultimately, a new precedent must be set by the Courts when determining the application of force majeure clauses and the application of the common law doctrines.  The Coronavirus will require the Courts to decide whether to apply a liberal determination. Contact The Sterling Firm to speak with an experienced attorney who can advocate on your behalf.