Contracts, Compliance, and Coronavirus – Defenses to Nonperformance in the Age of Coronavirus

Litigation Alert

Firm Alert

Author(s)

As the coronavirus (COVID or COVID-19) races across the country, its effects on society—and the business community—become more pronounced by the day. States and localities are increasingly ordering citizens to shelter in place, shuttering a menagerie of “non-essential businesses,” and enforcing intra- and interstate travel checkpoints. Businesses, unfortunately but unsurprisingly, are suffering significant side effects from the bitter pill of societal shutdown. Every overburdened hospital, boarded-up restaurant, and idled hotel ripples up and down the supply chain, straining—and sometimes snapping—parties’ performance under leases, service agreements, and delivery contracts.

But can COVID-19 excuse non-performance? And if it might, what should businesses considering or defending against breach of contract, know? Contract terms, and the common law, may provide defenses to a COVID 19-driven breach. But no defense is one-size-fits-all: each is contract- and fact-specific. Using Florida law as a backdrop, this alert offers some general principles to guide businesses navigating nonperformance in the age of COVID-19.

Contractual Clauses – Force Majeure

Always start with the contract itself. Commercial contracts often contain “force majeure” clauses, designed to temporarily or permanently relieve performance for reasons beyond the parties’ control. Sometimes referred to as “act of God” or “right of termination for cause” provisions, unforeseeability and unavoidability are usually the touchstone of force majeure invocation. Force majeure clauses usually list triggering events, like acts of war, terrorist events, strikes, floods, fires, or epidemics. Oftentimes, too, these clauses include broader catchall language, like “acts of God” or a “without limitation” modifier.

So, what should you do if your contract contains a force majeure clause? Once you identify the applicable clause, consider:

  1. Does COVID-19 count as a force majeure event? If events like “pandemics,” “epidemics,” “diseases,” “acts of government,” or “national emergencies” are included, the clause may be in play. Broader language like “acts of God” or “circumstances beyond the parties’ control” could work too. But Florida courts “narrowly construe” force majeure clauses. If COVID-19, or a category it fits into, isn’t specifically identified, the contract may not excuse performance.
  2. Is a breach, or potential breach, attributable to COVID-19? It isn’t enough that COVID-19 fits a force majeure provision. Coronavirus, or its effects, must cause the nonperformance.
  3. Does the provision impose a standard on the nonperformance event? For example, does the provision require nonperformance be “impossible” or “impracticable”? If so, consider whether the breach meets that standard. Whether the breaching party is subject to a government shutdown order, is an “essential business,” or is temporarily understaffed, all conceivably inform this analysis. There is at least some authority that, in Florida, force majeure provisions can excuse even foreseeable nonperformance – if the nonperformance is otherwise enumerated in the contract.
  4. Does the provision require pre-breach notice? Some contracts require that the breaching party provide notice before invoking force majeure.

Keep in mind that, in Florida, the nonperformer carries the burden of proof. It falls on the breaching party, then, to show that the force majeure clause contemplates COVID-19; that COVID-19 caused the breach; that the breach satisfies the appropriate standard; and that the breaching party discharged any applicable notice provisions.

Common Law Cousins – Impossibility, Impracticability, and Frustration of Purpose

What if there isn’t an applicable force majeure provision? Common law may offer some outs. Impossibility, impracticability, and frustration of purpose are a trio of affirmative defenses potentially available to pandemic nonperformers. Though technically distinct, courts in Florida (and elsewhere) tend to blur these “cousin” contract defenses.

Broadly speaking, this class of affirmative defense excuses nonperformance where “an unanticipated circumstance” makes performance “vitally different” than what the parties should’ve anticipated. On one hand, the defenses are broader than they suggest: they aren’t limited to “specific categories of fact” and, as the impracticability variant suggests, don’t require impossibility in-fact. On the other hand, Florida courts apply the defenses “with great caution”: if the breach-inducing event was foreseeable, yet went unmentioned in the contract, the defenses likely fail.

How does COVID-19 fit in? For starters, it must, at minimum, significantly impede performance. If local authorities shut down your “non-essential” business, the mall you operate in closes, or most of your staff catch COVID-19, these defenses could have purchase. Yet even those facts might not be enough. Because courts sanction these defenses sparingly, a strong foreseeability showing – using past pandemics or other government shutdowns, for example – could be enough to overcome impossibility, impracticability, and frustration of purpose defenses.

Concluding Considerations

COVID-19 leaves contracting parties with much to consider. Before confronting or considering nonperformance, businesses should first examine any applicable insurance policies. Event cancellation, property, and commercial general liability policies could all offer coverage. Bradley is well-positioned to advise on any potentially pertinent policies.

Consider negotiating through performance issues, too. One-off, temporary contract amendment is often cheaper, easier, and faster than protracted litigation.

When it comes to nonperformance, tread carefully. Businesses considering breach need to closely review their contracts – for force majeure provisions – and circumstances – to assess how COVID-19 impacts their obligations. If you’re scrambling through another party’s breach, make sure to mitigate your damages. Seek substitute performance, alternative goods, or your own upstream and/or downstream contract modifications.

COVID-19’s effects will echo forward too. Future force majeure provisions, especially those drafted for businesses vulnerable to supply shocks, might benefit from language covering public health-related disruptions. COVID-19 could also change foreseeability analyses. Right now, whether COVID-19 was foreseeable for purposes of impossibility, impracticability, or frustration defenses, is an open question. Less so, of course, going forward.

Whether you’re just considering contingencies or working through ongoing nonperformance issues, Bradley stands ready to help.