How To Deal With Your Contractual Obligations During Coronavirus
By: Attorney Z. Suzanne Arbide
In light of the Coronavirus many businesses are confronting circumstances that may excuse or delay their obligations to perform under existing contract due to the occurrence of a force majeure event, impossibility of performance or frustration of the purpose of the contract. Here are some suggestions on how to deal with your contractual obligations during Coronavirus:
Negotiate A Modification of Your Contract
We first urge you to review your contract and contact your commercial counterparties to attempt to negotiate and cut a new deal. If you are a business owner, chances are pretty high that the emergency or executive order from the Mayor’s or Governor’s office has affected or will drastically affect your business. Under the circumstances, your counterpart should be sympathetic to your position and recognize your business is under strain. However, your counterpart is likely facing stressors of its own, and to the extent you have no defenses, it will not excuse your failure to perform.
In engaging in negotiations with your counterparties, you must be aware of certain defenses that may be available to you and should use it during your negotiations with your counterpart to modify, amend or cancel the contract. But, invoking these defenses was, is and will continue to be (at least as long as you do not wait too long) an option. Ideally, you must attempt to prevent your counterpart from holding you to the original contract terms. Being prepared to negotiate – and having a credible defense to non-performance in hand – is a useful start in negotiating a modification of your contract and securing a better outcome for you.
One of your best options is if your contract contains a “Force majeure” clause and the event in discussion is covered by it. “Force majeure” is French for “superior force” and the long and short of it is that if some massive supervening event prevents the parties from performing an obligation, the performance of that obligation may be excused. See, an example of a Force majeure clause in a contract:
In no event will either party be liable or responsible to the other party, or be deemed to have defaulted under or breached this agreement, for any failure or delay in fulfilling or performing any term of this Agreement, when and to extent such failure or delay is caused by any circumstances beyond such party’s reasonable control (a “Force Majeure Event”), acts of God, flood, fire, earthquake or explosion, war, terrorist, invasion riot or other civil unrest, embargoes or blockades in effect on or after the date of this agreement national or regional emergency, strikes, labor stoppages or slowdowns or other industrial disturbances, passage of Law or any action taken by a government or public authority.
As with all contract terms, the starting point for interpreting force majeure clauses is the language used on the face of the contract. Many force majeure clauses list specific triggering events, which vary by contract. The following triggering events, if listed in a force majeure clause, may be implicated by Coronavirus: (1) Epidemic or communicable disease outbreak, (2) quarantines, (3) disruption of transportation systems, (4) disruption of labor force, (5) National emergency, (6) “Act of God”, Act, and (7) order, or requirement of any governmental authority. These events are just a starting point, there may be a “catch-all” phrase such as “or other similar causes beyond the control of such party.”
You should review your contract to determine which triggering events are listed within your contract’s force majeure clauses, and whether the problems you are facing in fact were cause by the triggering event as defined by the language of the contract. You should also review your contract’s notice and dispute resolution provision and make sure you comply with any specific requirements for invoking a force majeure clause.
Impossibility does not have a uniform definition among states, but borrowing some case law from D.C., a thing is impossible when it is literally impossible, or “when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost.” In Florida, “[u]nder the doctrine of impossibility of performance or frustration of purpose, a party is discharged from performing a contractual obligation which is impossible to perform and the party neither assumed the risk of impossibility nor could have acted to prevent the event rendering the performance impossible.” “[T]he defense of ‘impossibility may be asserted in situations where purposes for which the contract was made, have, on one side become impossible to perform”’. However, the facts and circumstances, and the terms of the agreements governing the relationship, will determine whether impossibility is available, or not. “The doctrine of impossibility of performance should be employed with great caution if the relevant business risk was foreseeable at the inception of the agreement and could have been the subject of an express provision of the agreement.”
Facts and circumstances, and the terms of the agreements governing the relationship, will determine whether impossibility is available, or not.
Frustration of purpose
The other defense available in the absence of contractual terms is frustration of purpose, or simply “frustration.” “The doctrine of ‘frustration of purpose’ excuses performance by a party where the value of performance regarding the subject of an agreement has been frustrated or destroyed.” Stated another way, “[f]rustration of purpose refers to that condition surrounding the contracting parties where one of the parties finds that the purposes for which he bargained, and which purposes were known to the other party, have been frustrated because of the failure of consideration, or impossibility of performance by the other party”and has rendered the performance worthless to one of the parties.
Of course, these areas are complex, and you can be sure that (1) if you invoke frustration, (2) your counterparty may disagree with your version of reality and (3) the dispute may see the inside of a courtroom.
In order to qualify for the defense of frustration of purpose, there must have been an unforeseen event that severely undermines the original justification for entering into the contract.
Facts and circumstances, and the terms of the agreements governing the relationship, will determine whether “frustration of purpose” is available, or not.