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(4) The Coronavirus and your Contracts. What now?

The Coronavirus and Your Contracts. What Now?

What happens when you cannot perform under your contracts due to complications surrounding the Coronavirus (COVID-19)?  Are you excused from performing or are you permitted to delay performance of your obligations?  Can you terminate the contract entirely?  The short answer is, it depends.  Each situation is individual and specific to the contract language and circumstances of the parties. That being said, the following outlines some common questions and factors to consider when reviewing rights and obligations under your contracts:

Is COVID-19 an event of force majeure?

A force majeure clause is a contractual provision that excuses performance of one or both parties when circumstances arise which are beyond the parties’ control. The events that arise to a force majeure clause are fact-dependent and are largely based on the specific language of the contract. Triggering events typically enumerated in force majeure clauses include Acts of God, terrorism, acts of government authority, labor disputes and strikes, and certain types of accidents.  With regard to COVID-19, applicable terms in force majeure clauses include “pandemic,” “epidemic,” “governmental policies/regulations” or even a broader “circumstances beyond a party’s control.”  If a force majeure clause does not explicitly allow for a delay or excuse in performance as a result of an applicable triggering event such as these, you may find it more challenging to invoke the force majeure protections.

Is COVID-19 an “Act of God”?

What if your force majeure provision does not include a right to delay or limit performance as a result of a pandemic, governmental regulation, or other seemingly applicable clause?  Many force majeure clauses allow a delay or excuse in performance due to an “Act of God.”  Is COVID-19 an “Act of God”?  Florida law has not defined the legal term “Act of God,” and under most circumstances, the term has generally been reserved for natural events, more specifically weather conditions like hurricanes.  Even so, it isn’t entirely clear under Florida case law to date whether a pandemic such as this one could be considered an “Act of God” or whether an executive order might be an intervening human event that could negate the “Act of God” defense.

 I’ve Heard Arguments for Impossibility of Performance and Frustration of Purpose. Could Those Help Me Here? 

Impossibility of performance is a legal concept that allows a party’s performance under a contract to be excused if their performance has been rendered impossible by an “Act of God,” law, or another party, and the party neither assumed the risk of impossibility nor could have prevented the event rendering the performance impossible.  Whereas force majeure is a contract defense, impossibility of performance can be argued outside of the language of the contract.  As such, this doctrine could potentially be a defense to performance even if you don’t have a force majeure clause in your contract.

Florida courts have generally held that the defense of impossibility of performance may be available when an event has occurred that is: (i) outside control of the parties; (ii) either truly makes performance impossible or completely frustrates the purpose of the contract; (iii) was not anticipated at the time of the contract; and (iii) could not be mitigated. Impossibility of performance refers to the nature of the thing to be done, and not to the ability of the party to perform what the party has agreed to do. Florida law additionally requires that the performance truly be impossible or nearly impossible, rather than just impractical.

For contracts entered into before COVID-19 reached the United States, the pandemic will likely to be found to be a significant external event, outside the control of the parties, and not foreseeable at the time of the contract. As such, if the affects of COVID-19 make performance under the contract impossible, then it seems likely that the doctrine of impossibility could apply as a defense to performance of those obligations that have been made impossible. Contracts entered into in the midst of the COVID-19 pandemic are more likely to be enforced, as the party seeking relief should have been aware of the potential challenges of performance at the time of entering into the contract.

Frustration of purpose is another non-contractual defense that can act to excuse or delay performance when a party’s principal purpose is substantially frustrated, without fault of that party and by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made.  The doctrine of frustration of purpose has not been well established in Florida courts and although the concept appears on its face, to be applicable to a larger group of situations, in practice, the use of this defense may prove to be more challenging.

If Impossibility or Force Majeure Apply, Can I Use Them to Avoid Payment of Monetary Obligations?

Impossibility of performance and frustration of purpose generally excuse only those obligations that a party is truly prevented from performing as a result of the event.  Market conditions are typically not considered one of those.  For example, if a landscaping business is forced to close as a non-essential business, it will likely be able to use a defense of impossibility to avoid completing its jobs during the period of forced closure.  On the other hand, because banks and other financial institutions are still operating, the business should not be allowed to avoid paying its creditors during that time, even if anticipated income was lost due to an event of force majeure or impossibility.

In summary, your situation is different and specific to you and the party you contracted with.  You will need to carefully review your contract and your particular situation to determine if you can use any of these defenses.  Winderweedle, Haines, Ward & Woodman, P.A. is here as a resource to you as you navigate these issues.  Please do not hesitate to reach out to us if you have any additional questions or would like any legal advice moving forward.

Heather S. Moraes, Esquire
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