COVID-19 as a Force Majeure and the Doctrines of Commercial Frustration, Impossibility and Impracticability: When Available and Avoiding Unintended Consequences
April 2, 2020
By Robert C. Bates and Anthony Eulano
As the novel Coronavirus (“COVID-19”) pandemic progresses, many businesses are exploring their ability to excuse performance under their existing commercial leases and other contracts. Businesses also should consider how certain business decisions – although sound – can lead to unintended consequences. For example, the temporary closure and repurposing of a commercial business may result in defaults associated with loan instruments, lease documents and other contracts.
First, it is important for businesses to understand force majeure and the doctrines of commercial frustration, impossibility and impracticability.
Force Majeure Provisions
Force Majeure is a contractual defense for a party’s inability to perform its obligations under a contract due to unforeseen and uncontrollable circumstances, such as COVID-19. If applicable, a force majeure provision may limit a party’s liability and relieve or suspend certain contractual obligations.
Many force majeure provisions specify events that the parties deem to be force majeure. A party will likely be able to argue that COVID-19 is a force majeure if the provision contains language specifying “pandemic,” “disease,” or similar. If the provision lacks those specific words, COVID-19 might be considered a force majeure through a general “catch-all” phrase included in the provision which encompasses all other events beyond the control of the parties.
This is a fact-specific inquiry that is highly determined by the terms of the lease or other contract involved, laws of the jurisdiction and surrounding circumstances. It is strongly recommended that a business consult with its legal counsel for a thorough review of the force majeure provision and the case-by-case analysis on its application.
Doctrines of Commercial Frustration, Impossibility and Impracticability
Depending upon the jurisdiction, the doctrines of commercial frustration, impossibility and impracticability may provide remedies in lieu of, or in addition to, a force majeure provision in a lease or other contract.
Commercial frustration may terminate a lease or other contract and release both parties from performance when an unexpected, unforeseeable event occurs which renders performance effectively worthless. Commercial frustration is generally a difficult standard to meet. Although dependent upon the terms of the contract and laws of the jurisdiction, the spread of COVID-19 may invoke commercial frustration through its effects on business closures, nationwide travel or a lack of a supply of goods essential to the contract.
Commercial impossibility applies when an unexpected, unforeseeable event renders performance objectively impossible. For example, mandatory quarantines, emergency governmental declarations and restrictions for travel due to COVID-19 may rise to commercial impossibility. However, a business incurring additional debt or adopting financially unfavorable policies may not be sufficient to meet the high standard of commercial impossibility.
Commercial impracticability excuses a party’s performance when an unexpected, unforeseeable event materially transforms such performance under the contract. Like commercial frustration and impossibility, proving that performance is “impracticable” is a high standard. However, if COVID-19 has affected certain supply sources or freight options (or if no other alternatives are available, even if more expensive) and the party must comply with emergency governmental declarations or executive orders, performance may be excused by commercial impracticability.
Avoiding Unintended Consequences
Next, even if the foregoing remedies are applicable, legal counsel can advise a business of its other rights and remedies available in its interconnected contracts. This may help prevent a business from unintentionally breaching other contracts within the transaction and allowing several parties to enforce default remedies that are available in each contract.
A business should consider engaging legal counsel to thoroughly examine its other contracts before moving forward with a business decision that deviates from its contractual performance and obligations under a specific lease or other contract. For example, if a business considers applying for a federal disaster relief loan, such a loan may violate the terms of its existing loan documents unless waivers are obtained from its existing lenders.
Once these documents are reviewed, it is also important for a business to communicate with its landlords, lenders and other contractual parties to discuss the financial and practical effects of such business decisions. By doing so – especially during the COVID-19 pandemic – all parties may be able to negotiate an agreement which avoids causing a default not only under a particular lease or other contract, but also under its interconnected loan instruments, lease documents or other contracts.
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