Contracts and COVID-19
As governments, businesses, and individuals continue to take actions to manage the impact of COVID-19, it is likely that performance of contracts agreed to before the pandemic will become difficult, if not practically impossible. This article discusses breach of contract liability when the breach is caused by events outside of your control.
Many contracts include a force majeure or act of God clause that allows one or both parties to not perform its obligations under the contract if certain events happen. Texas law does not provide one universally accepted example of a force majeure clause, but there are specific events that will trigger force majeure (fire, storms, acts of God, orders by governmental authorities, etc.). In determining whether a force majeure clause applies, the courts will try to figure out the true intent of the parties as expressed in the contract. The clause may specifically include pandemics, or it may include more general language that would include a pandemic. Specific to the COVID-19 pandemic situation, other factors to consider include whether it is impossible to perform under the contract because of a government order (e.g. a shelter-in-place order), circumstances created by or related to the pandemic. Another factor to consider is whether the pandemic was foreseeable at the time of the contract was made.
It is unlikely that the force majeure clause in your contract specifically references global pandemics, like COVID-19, as an excuse for performance. If any incident related to COVID-19 does not fit into one of the specific incidents of force majeure outlined in the contract, you may have to rely on catch-all language in the clause to excuse performance. In this event, Texas law has held that a party must not only show that the incident in question falls into the catch-all language of the force majeure clause, but that the event in question was not foreseeable by the parties when they agreed to the contract in the first place.
Yes. Nearly all commercial contracts, including most commercial leases, contain some form of force majeure clause. However, usually in the event of a force majeure, commercial tenants are typically still on the hook to pay rent to their landlords. Many commercial leases include language stating that force majeure may not be raised as a defense for a tenant’s non-performance of any obligations with regard to the payment of rent. Of note, these carve-outs also act to shield landlords from tenants that refuse to pay rent because of a force majeure that prohibits those tenants from entering or continuing their business operations on leased premises.
Rent aside, force majeure usually excuses landlords and tenants from other performance under their commercial leases, but only for a period equal to the prevention, delay, stoppage or inability to perform. And of course, if a commercial lease does not include the carve-out language referenced above, even a tenant’s rent may be subject to a force majeure clause.
Especially in the commercial real estate context, it is important to check your contract and be proactive with an experienced attorney, your landlord, tenant, or lender to discuss the circumstances and your options. Option may include negotiating modifications and forbearance agreements, which put in writing in advance how the parties intend to deal with the pandemic’s impact on their business relationship. Businesses should also take a close look at tax and cash flow relief programs available to them from the federal and state governments and their respective agencies. Commercial landlords and tenants should research sources of financial and tax relief, and discuss the same with their trusted attorneys, accountants, brokers, and advisers. You can find additional economic assistance and information for small businesses here.
When there is no force majeure clause in the contract (or if no written form of the agreement exists), then it will not be possible to use a force majeure defense, and you will have to make other affirmative denses based on Texas common law such as the defense of impossibility of performance.
Typically, this type of common law defense is applied when circumstances arise – such as a change in the law or court order – that make a party’s performance under the contract impossible or impracticable. Whether an intervening event caused by COVID-19 would be considered reasonably anticipated in a contract will likely be a case-by-case determination by the courts. The party seeking to excuse performance should be prepared to present evidence that shows the act in question was not contemplated by the parties at the time the contract was executed. Additionally, a party seeking to excuse its failure to perform must also demonstrate that they are without fault.
If the contract in question deals with the sale of goods, another option to force majeure language can be found in Article 2 of the Uniform Commercial Code, codified in Texas under Chapter 2 of the Texas Business and Commerce Code. For such contracts, a party could potentially argue that any alleged failure to perform is excused by Section 2.615 of the Texas Business and Commerce Code, which states that delay in delivery or non-delivery by a seller is not a breach of the contract if performance “has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made." If this scenario occurs, the seller must have provided notice to the buyer that there will be a delay or non-delivery. In addition, in the event the seller has the capacity to partially deliver some of the goods promised under the contract, and has contractual obligations to deliver the product to other parties, excuse of non-performance under Section 2.615 is allowed only if the available products are shared among the sellers’ customers in a fair and reasonable manner.
Whether seeking to enforce a force majeure clause or invoking a common law defense, it is highly recommended that you work with a lawyer when evaluating your contractual rights and obligations. The remedies and defenses discussed in this article will depend on fact-intensive questions and turn on Texas contract law and analysis. This means that no single remedy or defense fits every contract. Talking with a lawyer about your contracts can help limit your risk and more accurately evaluate your rights during this ever-changing COVID-19 pandemic. This is a very unique situation and many courts are responding to it in varying ways. You can find more information about hiring a lawyer and limited scope representation here.