Mitigating Commercial Losses From the Reaction to the Coronavirus (COVID-19)
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In addition to the concern over actually contracting the Coronavirus (“COVID-19”), business owners have additional concerns, to wit: how the reaction to COVID-19 will impact their business and how they can protect their business and mitigate losses during this volatile time. Much of these concerns are created not by contracting the virus itself, but by the reaction to the virus including measures being taken to prevent the spread of the virus.
The widespread concern over contracting COVID-19 has led to cancellation of events worldwide. Additionally, many employers have imposed significant restrictions on their employees including travel restrictions, requiring employees to work remotely and cancellation of long-planned business conferences and events. Certainly, the reaction to COVID-19 will have a significant trickle-down effect on business.
Certain industries will be hit hard including the hospitality industry, supply chain, manufacturing and construction. Nevertheless, no matter the industry, most businesses will likely feel the impact of the reaction to COVID-19 even if none of their employees, friends or family members ever contract the virus. As a result, all businesses should have a plan in place to proactively deal with challenges on the horizon.
One of the challenges most businesses will face is the effect on existing business contracts. All contracts include an element of performance but what happens when a business cannot perform under the contract? Is the business in breach of the contract? Are there any defenses to the enforcement of the contract? Can the business refuse to perform under the contract? Business owners need to be prepared to answer these questions.
Defenses to the enforcement of performance obligations in a contract
All contracts include an obligation of performance of the parties. For example, a contract may obligate one party to provide materials or services and obligate another party to pay for the materials or services. No matter the performance obligations, COVID-19 will affect performance. While a party may have a legal defense to continued performance under the contract, it is important to remember that most if not all businesses will feel the impact of COVID-19. As such, it is important for all businesses to consider not only potential legal defenses to contractual performance but also practical considerations. Smart businesses and good legal counsel will consider both.
Practical considerations to the enforcement of contracts.
Given that the effect of COVID-19 will be felt by most businesses, it is important to give weight to practical considerations to the enforcement of a contract. That is, how will COVID-19 affect each party and how can the contracting parties work together to ensure they both mitigate their losses?
Consider the following example. Business A is a corporation that is planning to hold a large event and Business B is hosting that event. Some event services agreements permit cancellations but require a cancellation fee. Others require nonrefundable deposits. Given the circumstances of COVID-19 and avoiding large social gatherings, Business A decides that it must cancel its event. Will Business B charge Business A the full cancellation fee? Will Business B refund any portion of the deposit to Business A? While the contract may address precisely what happens in this situation, other contracts will not be as clear.
While the hospitality industry has already been hit hard by the reaction to COVID-19, other industries will also feel the impact. The supply chain industry will have suppliers who are not able to provide materials in the time required under their contracts. In turn, manufacturers will not be able to obtain the materials and supplies needed to manufacture their product despite already having orders for the product. The construction industry may encounter delays in obtaining materials, an increase in cost of materials, customers who are concerned with moving forward with projects or lenders who may want to pull back from financing and focus on risk mitigation and conservative underwriting.
The following is a list of practical considerations when deciding how to address contractual performance failures due to COVID-19:
- How is COVID-19 affecting each party’s business
- The length of the relationship between the parties
- Future business opportunities
- The PR effect of certain businesses refusing to cooperate
- The societal effect of requiring performance despite a party’s inability to perform
While practical considerations should always be given weight, many businesses will not be swayed by such considerations. In those situations, legal defenses must be considered as well.
Legal defenses to contractual performance.
There are many legal defenses to performance under a contract in the state of Florida. The three main defenses to consider in determining whether the reaction to COVID-19 will provide a defense to failure of performance are: 1) whether the contract includes a force majeure clause and, if so, what that clause says; 2) the doctrine of impossibility of performance; and 3) the doctrine of frustration of performance. See Mailloux v. Briella Townhomes, LLC, 3 So. 3d 394 (Fla. 4th DCA 2009) (recognizing that acts of God (including force majeure clauses), impossibility of performance and frustration of performance are all well-recognized defenses to nonperformance of a contract).
- Force Majeure Clauses.
A force majeure clause is a contractual provision allocating risk of loss if performance becomes impossible or impractical as a result of an event or effect that the parties could not have anticipated or controlled. Force Majeure Clause, Black’s Law Dictionary (11th ed. 2019). Force majeure means “[a]n event or effect that can be neither anticipated nor controlled . . . [and] includes both acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes, and wars).” Force Majeure, Black’s Law Dictionary (11th ed. 2019).
Many contracts include force majeure clauses to excuse performance failures. However, and critically, not all force majeure clauses are the same. The language used in the force majeure clause will determine whether the effect of COVID-19 will excuse performance. See S&B/BIBB Hines PB3 Joint Venture v. Progress Energy Fla., Inc., 365 Fed. App’x. 202, 204-05 (11th Cir. 2010) (holding that a force majeure clause in a contract must be interpreted according to its plain and unambiguous meaning); Cartan Tours, Inc. v. ESA Servs., Inc., 833 So. 2d 873, 874-75 (Fla. 4th DCA 2003) (finding a force Majeure clause ambiguous where it provided “[i]n the event of material acts, including without limitation, civil disorder, strikes, government actions, terrorism, or other material acts beyond the reasonable control of either party to this Agreement, and affecting the ability of the Olympic Games to be held, the Hotel shall refund to Cartan all RLC payments made by Cartan pursuant hereto . . . .) (emphasis added)).
An example of a force majeure clause that could arguably be used as a defense to failure to perform due to the reaction to COVID-19 is as follows:
A force majeure is defined for purposes of this agreement as: Acts of God or the public enemy; expropriation or confiscation of facilities; compliance with any order of any governmental authority; shortage or unavailability of materials, equipment, labor or technical personnel; . . . epidemics or breakdowns; riots, strikes, slowdowns and walkouts, blockouts, or other industrial disturbances, whether direct or indirect; or any cause, whether or not of the same class or kind as those specifically named above, not within the reasonable control of the company.
St. Joe Paper Co. v. State Dept. of Environmental Regulation, 371 So. 2d 178, 180 (Fla. 1st DCA 1979) (emphasis added) (implicitly recognizing that a force majeure clause that excuses delay for “any cause . . . not within the reasonable control of the company” was enforceable).
The force majeure clause in Cartan Tours, Inc. (i.e., “beyond the reasonable control of either party”) and in St. Joe Paper Co. (i.e., “not within the reasonable control of the company”) may be broad enough to excuse performance due to the reaction to COVID-19. However, many other force majeure clauses are shorter and raise more questions than answers. Consider the following example:
Neither party shall be required to perform any term, condition, or covenant in this Agreement so long as such performance is delayed or prevented by force majeure, which shall mean acts of God, war, terrorist act, strikes, lockouts, material or labor restrictions, damage to or destruction of facilities, or prohibitions by any governmental authority.
Whether delay in performance as a result of COVID-19 would be excused under this force majeure clause is less certain. It may depend on whether there was a governmental action affecting the party’s performance. It may also depend on whether the term “act of God” includes COVID-19 and the world’s reaction to COVID-19.
Black’s Law Dictionary defines “act of God” as “[a]n overwhelming, unpreventable event caused exclusively by forces of nature, such as an earthquake, flood, or tornado.” Act of God, Black’s Law Dictionary (11th ed. 2019). Based upon this definition alone, COVID-19 may not qualify as an act of God. However, other sources indicate that unexpected illnesses may be considered an act of God. See 6 Am. Jur. Proof of Facts 3d 319, George A. Locke, J.D. (Feb. 2020 Update) (“Where an illness, such as a heart attack or stroke, takes hold suddenly and is beyond the power of human efforts to prevent, it qualifies as an act of God.”); see also Camacho Enters. Inc. v. Better Constr. Inc., 343 So. 2d 1296, 1297 (Fla. 3d DCA 1977) (excusing a party’s delay in performance where its president’s heart attack was a circumstance “beyond the control” of the company). Nevertheless, this does not answer the question of whether performance failures as a result of the reaction to COVID-19 (as opposed to being infected by COVID-19) will be found to constitute an act of God. It is reasonably foreseeable that such question will be highly litigated in state and/or federal courts.
In sum, whether a force majeure clause will excuse a party’s performance will likely depend on the type of business and the specific language used in the force majeure clause. In analyzing this issue, the following questions should be considered. Does the force majeure clause define what is meant by force majeure? Does it define what is considered an act of God? Does it use words such as pandemic, virus, disease, etc.? Does it include limiting language? Does it include broad language?
Businesses should consult competent legal counsel to review their force majeure clauses and obtain an opinion whether such clauses will excuse performance.
- The Doctrine of Impossibility of Performance.
As a general rule, a party is not discharged from contractual performance simply because a contract turns out to be difficult or burdensome to perform. See Home Design Center-Joint Venture v. County Appliances of Naples, Inc., 563 So. 2d 767, 769 (Fla. 2d DCA 1990). However, the doctrine of impossibility of performance is a defense to nonperformance of a contract where facts making the performance impossible were not available to the parties prior to execution of the contract. See American Aviation, Inc. v. Aero-Flight Service, Inc., 712 So. 2d 809 (Fla. 4th DCA 1998). This doctrine is used with great caution if the relevant business risk was foreseeable at the inception of the agreement. Id.
The reaction to COVID-19 will likely make performance under certain contracts impossible. This will depend on the industry and the performance required under the contract. While COVID-19 may render some performance impossible, in other circumstances, it may simply make performance more difficult. As such, whether the doctrine of impossibility of performance will provide a defense to contractual performance must be evaluated on a case-by-case basis.
- The Doctrine of Frustration of Performance.
The doctrine of frustration of performance means that the purpose for which the parties entered into the contract has been frustrated and provides a defense to further performance. See Crown Ice Mach. Leasing Co. v. Sam Senter Farms, Inc., 174 So. 2d 614, 617 (Fla. 2d DCA 1965); Equitrac Corp. v. Kenny, Nachwalter & Seymour, P.A., 493 So. 2d 548, 548 (Fla. 3d DCA 1986). While the doctrine of impossibility of performance comes into play when it is impossible for one party to perform, the doctrine of frustration of performance applies to the underlying purpose of the contract being frustrated. Crown Ice Mach. Leasing Co., 174 So. 2d at 617.
The effects from the reaction to COVID-19 will frustrate the purpose of some contracts. However, whether the doctrine of frustration of performance will be a successful defense to contractual performance failures will depend on the purpose of the contract and will have to be evaluated on a case-by-case basis.
In the end, hopefully businesses who have long-term relationships with one another will give great weight to practical considers and work cooperatively to survive this tumultuous time and mitigate losses. This will necessarily involve strong legal counsel who will give consideration to both the legal and practical effects of the situation.
The attorneys at Jimerson Birr understand the concerns affecting businesses as a result of the reactions to COVID-19 and are working with their clients to make informed decisions and help mitigate losses during this unprecedented time.