Governments across the country have closed public institutions and private businesses such as bars, restaurants, and cafés to limit the spread of COVID-19. In addition, businesses outside of the hospitality industry have closed offices and scaled back operations pursuant to government-imposed “shelter-in-place” or “safer-at-home” orders. Even absent such orders, businesses are reducing operations pursuant to federal guidance to practice “social distancing” measures. While these closures are necessary measures to deal with a significant threat to public health, they are substantially impacting business revenue and income.
The lack of income resulting from forced or recommended closures is causing businesses and individuals to ask whether they can terminate or cancel contracts, including real property leases, construction contracts, supply agreements, and real estate purchase and sale agreements. Whether a contract can be terminated due to COVID-19 depends, ultimately, on the nature and terms of each individual contract.
The most commonly cited provision for excusing performance in a contract due to unforeseen circumstances and acts outside of the parties’ control is the “force majeure” provision. “Force majeure” or “Act of God” provisions are intended to allocate and mitigate risk and to relieve one or both parties to a contract from its obligation to fulfill contractual duties when performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated. A party seeking to invoke this provision is essentially declaring that it cannot, and will not, honor the contract because occurrences outside of its control have made it impossible to perform. If a party seeks to invoke a “force majeure” provision it has to prove that the qualifying event was unanticipated and beyond its control and the party was without fault or negligence in failing to anticipate the event or in bringing it about, and that the event made performance essentially impossible. “Force majeure” provisions are rarely found in real property leases or in real estate purchase and sale agreements, but they are common in construction contracts and in supply agreements.
What is within the scope of a “force majeure” provision varies depending on the nature of the contract and on the terms negotiated by the parties. For example, in a construction contract, in some cases a contractor’s inability to procure labor because of recommended “social distancing” measures associated with COVID-19 may qualify as “force majeure”, but in others a contractor’s inability to procure labor may only qualify as “force majeure” if the government orders all construction activity to cease. Similarly, a contractor’s inability to obtain materials because its suppliers have closed their stores may qualify as “force majeure” in some cases, while in others a contractor may only be able to claim “force majeure” if all material suppliers close their stores and also stop making deliveries.
Severe economic conditions or changes in the prevailing economic market have not traditionally qualified as force majeure events. For example, in OWBR LLC v. Clear Channel Communications, 266 F. Supp. 2d. 1214 (D. Hawai’i) the District Court ruled that the cancellation of rooms at a resort as a result of economic conditions after the 9/11 terrorist attacks was not a “force majeure” event. While this holding may be instructive in some regards, what sets COVID-19 apart from 9/11 is that, with COVID-19, the government has imposed mandatory business closures and travel restrictions. These may very well constitute qualifying force majeure conditions in contracts that feature “force majeure” provisions.
Related to force majeure is the doctrine of “impossibility.” Impossibility is a defense to non-performance of a contract. To qualify, “the impossibility must consist in the nature of the thing to be done and not in the inability of the party to do it.” Retail Merchant’s Business Expansion Co. v. Randall, 103 Vt. 268, 271 (1931). Moreover, not only must the act to be performed be impossible, the impossibility must also be “because of a fact of which [the contracting party] has no reason to know and the nonexistence of which is a basic assumption on which the contract was made.” Agway, Inc. v. Marotti, 149 Vt. 191, 193 (1988). As with “force majeure”, whether the business closures, travel restrictions, and recommended “social distancing” measures associated with COVID-19 satisfy these requirements depends on the nature of the contract in question.