Covid-19 and Contracts - am I Still Obligated? (Part 1)
As everyone knows, the Covid-19 pandemic has affected nearly every aspect of everyday life. Shortages of goods, tenants unable to pay rent and lost income impacting individuals’ ability to pay bills all have implications for contract obligations. I am often asked if there are ways to delay relieve contract obligations that can’t be met because of the pandemic. The answer is yes, sometimes. This blog outlines common contract provisions that should be carefully reviewed. In Part 2, Unwritten Contract Rules I’ll discuss some relevant general legal principles that may be helpful.
Force Majeure (“major force”) provisions are common to many contracts. A force majeure event is one that is out of the control and often expectations of the parties, resulting in one or both unable to perform one or more contract obligations. Contract language often cites force majeure events such as acts of God, war, insurrection, labor strikes and government orders. A hurricane or other severe weather event that destroys manufacturing facilities or goods to be delivered, blockage of transportation routes due to a war or insurrection and goods contracted for purchase not deliverable due to a trucking union strike are force majeure. I have not seen many contracts with a specific force majeure provision for pandemic disease, but other common contract provisions may apply to a situation such as Covid-19:
· Interruption to delivery of goods or materials (think of the shortages of toilet paper and other consumer goods during this pandemic);
· Government orders – businesses forced to close with no alternative means to perform (e.g., nature of the business is such that employees cannot work remotely, such as manufacturing, construction or physical maintenance);
· Emergencies that would pose a significant risk to public health or safety (no explanation needed here – that’s Covid-19)
What are the parties supposed to do if an event of Force Majeure occurs?
A contract might include several remedies. The party affected to the other party’s inability to perform because of force majeure may terminate the entire agreement or only that part of the agreement specific to the force majeure event could be modified. For example, if a contract calls for the delivery of 100 boxes of soap for $50.00 and the force majeure event only allows 50 boxes to be delivered, then the receiving party would be justified is paying the amount of $25.00.
Recently, I heard from a person whose company contracted with an event planner to participate in the Boston Marathon Expo the weekend prior to the race. He deposited several thousand dollars with the event planner. The live event was planned at a convention hall near the finish line. However, due to Massachusetts Governor Baker’s order limiting the size of indoor gatherings, the expo could not be held. However, the contract includes a force majeure clause: “[e]xhibitor agrees that in the event due to war, fire, strike, government regulation, public enemy, or other cause, the show or any part thereof is prevented from being held, is canceled by Show Management, Show Management, in its sole discretion, shall determine and refund to the applicant his proportionate share of unused funds.” (Force Majeure events applicable to Covid-19 italicized). But for the phrase “in its sole discretion”, the company was entitled to a full refund. Instead, the event planner touted an online “event” and didn’t offer any refund – presumably as a way to modify, rather than terminate the contract entirely. The exhibitor wasn’t happy about an online event. After all, prospective customers can’t touch or try out a physical product online and a chat box is not a substitute for a one-on-one conversation in person. See Part 2 of this blog, Unwritten Contract Rules about solutions for this type of situation that are not typically included in contracts.
These examples illustrate that a contract may still be performed in part if the parties agree. In the case of a contract that is impossible to perform, the contract and its obligations are simply terminated. Every law student studies the 19th century English case Taylor v. Caldwell. Taylor rented a music hall from Caldwell for several concerts, but the music hall was destroyed by fire before the first concert. Taylor sued Caldwell for breach of contract. The contract did not include any force majeure clause that would have addressed destruction by fire, but the court relieved Caldwell from his obligation to perform because of the impossibility of providing the venue through no fault of his own. Accordingly, the court rendered the contract null and void.
How to Prepare for and Manage a Force Majeure Event
Force majeure events are supposed to be unforeseeable. Of course, in a general sense, labor strikes, severe weather and other events do happen from time to time. No one can accurately predict months or years in the future if and when a specific force majeure event might occur.
When a force majeure event or an event that may prevent performance occurs, consider the following:
1) Make a record of the start dates of the force majeure event. I state “dates” because there may be more than one – for example, the date that you as a party to a contract first became affected and an “official” date, such as a government declaration or restriction.
2) How and when the force majeure event affected your ability to perform contract obligations. For example, if the government places a limit on the number of people who may congregate indoors and that results in not enough employees to produce goods or services under contract, that might excuse performance.
3) Efforts to perform obligations or to mitigate adverse impacts, notwithstanding a force majeure event. In the above example, is it possible to contract out work to a location without a restriction on the number of people in an indoor space?
4) The date you able to resume performance unless the force majeure event is ongoing, such as continuing pandemic restrictions. Ask yourself what changed that allowed performance to resume.
5) Is the other party’s performance also excused?
Communicate with the other party before you declare that your performance is relieved due to force majeure. The other party may not know all of the relevant facts and circumstances and may have an entirely different view. It is a lot easier to resolve issues early before they become contentious. Be sure to review any notice provision in the contract. You may be required to provide written notice of a force majeure event and proof of mailing, such as by certified mail.
Conditions to Performance
Many contracts include conditions or prerequisites to performance. Read the contract carefully and determine whether one or both parties are obligated to perform under the conditional contract clause. You can think of conditions as either “internal”, meaning applicable to only the parties to the contract or “external”, meaning applicable to the occurrence of some action or event, by either an identified third party or a general action that could apply to anyone, not only the parties to the contract. This list is by no means exhaustive but intended to illustrate language commonly found in contracts.
· Conditioned (or conditional) upon…
· Upon written notice…
· Upon payment of…
· Consent to…
· Approval of… (could be one party or a mutual obligation)
· Receipt of… (could be documents, goods, payment, etc.)
· Tender of… (in this context, meaning an offer, submittal or presentation)
· Completion of…
· Failure of…
· Upon the lender’s consent…
· Upon receipt of final, unappealable licenses, permits and authorizations…
· Government declaration or regulation of…
· Price not exceeding $_____ …
Existence of a condition not performed or impossible to perform under the circumstances doesn’t end the inquiry. Look for clauses whereby the defaulting party may remedy its failure to act or delay performance of its obligation - default and cure clauses are very common. Generally, the non-defaulting party is required to provide written notice to the other and the defaulting party has a certain number of days to cure the default. Of course, if the failure to perform is due to force majeure, it may not be a default per se because performance is excused. Bottom line: read the contract carefully and think about how various provisions relate to each other.
A waiver occurs when a party gives up a right stated in the contract. Waivers can be taken back by the waiving party unless the non-waiving relies on the waiver prior to retraction. For example, a contract calls for a product with precise specifications to be delivered to the buyer and the buyer has the right to reject non-conforming goods within a certain number of days following the delivery date. Payment is due the day following the last day of buyer’s rejection period. Buyer discovers that the goods in the most recent shipment depart significantly from the specifications but informs the seller she will accept the goods. Seller then expects payment and immediately emails an invoice to the Buyer. Buyer then informs Seller that she has changed her mind and doesn’t accept the goods. The retraction isn’t effective because the seller rightfully relied on the buyer’s representation.
Waiver language usually states that any waiver applies only to that particular instance. This is a typical waiver provision: “Any failure to comply with any obligation or condition in this agreement may be expressly waived by either party, but any such waiver of strict compliance with such obligation or condition shall not operate as a waiver of any other instance of non-compliance.” Get waivers in writing, even if it is only an email. Ensure that the scope of the waiver and its duration are clearly stated. If the other party to the contract is a corporation or other business organization, make sure the person providing the waiver is authorized to do so.
Know Your Financial Exposure
Limitation of Liability and Liquidated Damages
If you find yourself in a situation in which you cannot perform your contract obligations and the other party won’t relieve, modify or allow delay, it’s important to know your financial exposure. Some contracts include a limit of liability provision, which may be up to but not exceeding insurance coverage required by the contract. A liquidated damages clause specifies a fixed amount to be paid to the non-defaulting party, often accompanied by language such as “and the parties shall have no further recourse.” In other words, once liquidated damages are paid, that is the end of it. Watch for exceptions – a liquidated damages remedy may not be available for all defaults, such as a breach of warranty and for intentional acts.
Look for clauses that allow imposition (or exclusion of) damages above a party’s direct or actual damages. Without getting into too much detail, these types of damages may be identified in a contract as consequential, indirect, incidental, special, punitive or exemplary. Individual state statutes may authorize damages to be multiplied for truly bad behavior.
Unsure of what to do if you can’t fulfill a contract obligation or other party is violating the contract?