Force Majeure and Other Legal Options for Your Business During the COVID-19 Pandemic
What legal rights do you have to assist you in successfully managing your business contracts and minimizing your financial exposure and risk during this pandemic-induced economic downturn?
In January of 2020 U.S. authorities declared the Covid-19 viral outbreak a public health emergency. On March 11, 2020, the World Health Organization declared the Covid-19 viral outbreak a pandemic. The declaration of a Covid19 pandemic and the state, local and federal efforts to contain it have wreaked havoc on the economy. Closures of non-essential business have caused businesses to close overnight abruptly terminating cash flow endangering the very survival of many businesses. As a business owner, your contractual obligations to vendors, landlords, and other business partners continue, or do they?
This article will address some of the issues that can affect your ability to amend or break your contract due to conditions created by the Coronavirus epidemic. In Florida and in most other states, contracts are binding on the parties as written and courts will enforce the terms of a contract unless there exist specific conditions or events that merit altering the contract or excusing a failure to perform.
Can the Pandemic Excuse Performance of a Contract
In Florida, the freedom of parties to enter into contracts is highly guarded by the courts. “Courts may not ‘rewrite contracts or interfere with the freedom of contracts or substitute [their] judgment for that of the parties to the contract in order to relieve one of the parties from apparent hardships of an improvident bargain.’”[1] Generally, a party to a contract is not relieved of performing because the contract turns out to be difficult or burdensome to perform.[2]
However, there are several legal doctrines that a business owner may be able to use to successfully manage your existing contractual obligations during the coronavirus pandemic:
- Acts of God or force majeure
- Impossibility of Performance; and
- Frustration of Purpose.[3]
The application of these legal theories or doctrines act as defenses to the non-performance of a contract and may excuse performance or even a breach of the contract. Each one is distinct and applies only in given circumstances and it is best to consult with competent legal counsel before embarking on any actions that could further expose your business to additional liabilities.
If you are considering changing a contract or non-performance of the agreement due to situations caused by Covid-19, it is best to start with a review of the agreement itself. A review of the agreement and an understanding of its terms will permit you to understand your legal rights and to negotiate any necessary changes.
A Force Majeure Clause in a Contract May Excuse non-performance.
Most commercial leases and contracts include force majeure clauses. Force majeure clauses, if applicable, can excuse the non-performance of an agreement. Such a clause contractually allocates risks due to forces or casualties typically outside the contracting parties’ control and specifically identified in the contract that destroy a party’s benefit of the bargain or its ability to perform its obligations under the contract.
Typically, a force majeure is an act of God which is so extraordinary and unprecedented such that human foresight could not guard against it and the effect of which could not be prevented or avoided by the existence of reasonable prudence, and as such provides legal justification for nonperformance of a contract.[4]
If your agreement contains such a clause, it may excuse performance of the agreement. However, whether it applies to your situation so as to excuse performance of the contract requires a careful examination of the language of the provision along with a complete review of your particular facts and the entire agreement. Additionally, such clauses may contain notice provisions requiring notice prior to enforcing the clause. This is where the advice of competent counsel to guide you in the analysis will be of benefit.
If the Force Majeure Clause applies, then attempt to enter into discussion with your landlord or the other party to renegotiate the agreement.
If you and your counsel agree that the provisions of the clause apply to the current situation and may excuse your performance of the agreement, the next step is to contact the other party and attempt to reach an agreement as to the meaning and application of the provision and whether you are excused from performance. This is important because, if you and the other party cannot agree as to the meaning of a force majeure clause, or the clause is susceptible to more than one meaning, then it will be up to a court to decide both its meaning and applicability and the parties’ respective obligations.[5] This may land you in court incurring additional expenses.
Below are some examples of the application of force majeure clauses by the courts.
- In Joe Paper Co. v. State Dep’t of Envtl. Regulation, 371 So.2d 178, 180 (Fla. 1st DCA 1979) the court implicitly recognized that a force majeure clause that excused delays for “any cause . . . not within reasonable control of the company,” was enforceable.
- In Camacho Enterprises, Inc. v. Better Constr., Inc., 343 So.2d 1296, 1297 (Fla. 3d DCA 1977) the court interpreted the contract’s force majeure clause as excusing delay where its president’s heart attack was a circumstance “beyond the control” of the development company, thereby invoking the application of the force majeure
- A hurricane has been held to be a force majeure under the terms of the contract, excusing a party from performance of the contract. Florida Power Corp. v. City of Tallahassee, 18 So.2d 671 (Fla. 1944).
- Freeze and consequent frost damage was held to be an Act of God under the terms of a contract for the sale of fruit. Givens v. Vaughn-Griffin Packing Co., 1 So.2d 714 (Fla. 1941).
If it is unclear whether the force majeure clause applies or your agreement does not contain such a clause, do not despair, there may be other legal doctrines in which apply to your circumstance that may enable you to avoid performance of the contract.
IMPOSSIBILITY OF PERFORMANCE AND FRUSTRATION OF PURPOSE
Impossibility of performance and frustration of purpose are similar but distinct legal doctrines that like a force majeure clause may excuse performance of a contract. However, unlike force majeure, these doctrines arise by operation of law, that is, they are not clauses in a contract, but a court will nevertheless excuse nonperformance because certain conditions are present frustrating your ability to perform. These doctrines will apply as defenses to a claim for breach of contract.
Impossibility of performance refers to those factual situations where the purposes for which the contract was made have on one side, become impossible to perform. Frustration of purpose, on the other hand refers to that condition surrounding the contracting parties where one of the parties finds that he purposes for which he bargained and which purposes were known to the other party have been frustrated because of the failure of consideration, impossibility of performance by the other party.[6]
Whether these doctrines apply will depend on the particular facts and contractual language. Once again, it is best to have competent counsel review your particular facts, the language in the agreement to determine whether they are applicable.
Some examples of how Florida Courts have applied these two doctrines.
- Impossibility of performance did not apply where tenant failed to present sufficient evidence of its inability to obtain liability insurance required by lease, because its failure to obtain insurance did not render performance impossible under the lease terms.[7]
- Frustration of Purpose not found where party’s failure to obtain insurance per terms of the lease because any such difficulties could reasonably have been foreseen by the party, thus nonperformance was not excused.[8]
- Frustration of purpose excused lender from foreclosing its third mortgage on property owned by borrower prior to seeking recovery against personal guarantor of part of loan; debts secured by first and second mortgage on the property exceeded the value of property at the time of borrower’s default, and commencement of foreclosure, proceedings would therefore have been a futile act.[9] Hopfensiger v. West, 949 SO.2d 1050 (Fla. 5th DCA 2006)
- Doctrine of impossibility of performance did not release landlord from agreement, although taxes had increased since performance was not impossible but merely resulted in feelings of financial frustration, was merely inconvenient, profitless and expensive to landlord. Valencia Center, Inc. v. Publix Supermarkets, Inc., 464 So.2d 1267 (Fla. 3d DCA 1985).
[1] Fla. Power Corp. v. City of Tallahassee, 154 Fla. 638, 10 So.2d 671, 675 (1944).
[2] City of Tampa v. City of Port of Tampa, 127 So.2d 119 (Fla. 2d DCA 1961).
[3] Fla. Power Corp. v. City of Tallahassee, 154 Fla. 638, 18 So.2d 671, 675 (1944); Mailloux v. Briella Townhomes, LLC, 3 So.3d 394 (Fla. 4th DCA 2009).
[4] Florida Dept. of Financial Servs. V. Freeman, 921 So.2d 598, 608 (Fla. 2006) quoting Quinterly v. Dundee Corp., 159 Fla. 219, 31 So.2d 533, 534 (1947).
[5] Tire Kingdom, Inc. v. Waterbed City, Inc., 654 So.2d 1005 (Fla. 3d DCA 1995) and State Farm Fire & Cas. V. De Londono, 511 So.2d 604, 605 (Fla. 3d DCA) review dismissed, 519 So.2d 988; Car (Fla. 1987); Cartan Tours v. ESA Services, Inc., 833 So.2d 873 (Fla. 4th DCA 2003)(where meaning of force majeure clause lent itself to more than one reasonable interpretation, it was ambiguous and therefore subject to court’s interpretation.)
[6] Crown Ice Mach. Leasing Co. v. Sam Senter Farms, Inc., 174 So.2d 614 (Fla. 2nd DCA 1965).
[7] Home Design Center -Joint Venture v. County Appliances of Naples, Inc., 563 So.2d 767 (Fla. 2nd DCA 1990).
[8] Home Design Center -Joint Venture v. County Appliances of Naples, Inc., 563 So.2d 767 (Fla. 2nd DCA 1990).
[9] Hopfensiger v. West, 949 SO.2d 1050 (Fla. 5th DCA 2006)