On Monday, March 23, in response to the novel coronavirus (COVID-19) pandemic, Governor Northam issued Executive Order Number 53 “Establishing Temporary Restrictions on Restaurants, Recreational, Entertainment, Gatherings, Non-Essential Businesses, and Closure of K-12 Schools.” Certain businesses have been ordered closed or subjected to untenable operational limitations that will almost certainly result in loss of revenue, and delayed or impossible performance of regular activity. Even before the issuance of the Executive Order, many businesses had begun to limit access and occupancy voluntarily, or were suffering lower sales and customers as people began practicing best-practices to curb the spread of COVID-19. As of this writing, Congress is about to pass a multi-trillion dollar economic stimulus package in anticipation of a recession caused by virus-related business closures and loss of employment.
At Walsh, Colucci, Lubeley & Walsh, our attorneys have already received numerous inquiries as to the applicability of ‘Force Majeure’ clauses in leases, construction agreements, purchase contracts, and other commercial agreements; the availability of defenses to possible breach of contract claims arising from actions or inaction, arising from virus related social and economic condition; and whether the virus itself is an ‘Act of God’ that may excuse contract performance. This article, which presumes an otherwise enforceable agreement already exists, is an introduction to these topics.
What is ‘Force Majeure’?
Simply stated, the term force majeure means a “superior or irresistible force.” Virginia law recognizes that, in certain circumstances, factors beyond the control of the parties may render a party’s performance of its obligations under the contract impossible. These are commonly known as ‘force majeure’ events. If these events occur, a party may be excused from contractual compliance and may rely on the affirmative defense of “Impossibility of Performance” should a Breach of Contract claim be filed against them.
The important caveat to the above, however, is that Virginia law expressly permits parties to assume the risk that their performance may nonetheless be made impossible, or otherwise modify the conditions upon which a force majeure defense may be permitted or deemed to have occurred. In other words, parties are free to contract around the baseline standards of Virginia law and to agree what may be considered a force majeure event, and what will not. Hence, as with most questions related to the enforcement of contracts in Virginia, the analysis of the question necessarily begins with a review of the contract itself.
Is Force Majeure the same as an “Act of God”?
Many clients have asked what the difference is between force majeure and an “Act of God.” As a general rule there isn’t much, and the two terms are sometimes used interchangeably, especially in relation to the “Impossibility of Performance” defense. An illness or natural disaster may qualify as an “Act of God” or force majeure event. Notably, though in a different but relevant context, the Circuit Court of Madison County, Virginia, held this past March 19th, and as a matter of law, that the coronavirus pandemic is a Natural Disaster. If your contract stipulates, or triggers various defenses upon the occurrence of, a natural disaster, there is therefore precedent to claim such a defense already.
Conditions exist that will make completion of the contract hard, but not impossible, does that matter?
Importantly, Virginia law requires that the party relying on a force majeure event or an Act of God as a reason for non-compliance with a contract term do all in their power to provide substantial performance or delivery as soon as practicable. Virginia law may permit a party claiming impossibility a reasonable delay in time of performance or completion. It does not permit a party to simply walk away from a contract that the party has the capability to ultimately perform.
Can you provide some real world examples of “Impossibility of Performance”?
While most commercial agreements contain force majeure provisions, it is entirely possible that yours does not and remains governed by Virginia law on default. Or, it is equally likely that an agreement’s force majeure provisions are silent as to, or are unclear about, whether a pandemic such as COVID-19 is covered by the clause. In either case, Virginia case law does provide some insight as to the likelihood of success of a claim of Impossibility of Performance arising from government directed action and/or economic stress.
Change in Domestic Law
A “change in domestic law” is among the recognizable factors that may qualify as a basis for an “Impossibility of Performance” defense. The Circuit Court of Fairfax County has held that “it is generally accepted that government action may emanate from any level of government and technical distinctions between law, regulation, order and the like are disregarded.” If the performance of the contract has been adversely affected by any state or federal regulation, precisely such as Executive Order 53, which in some instances carries with it a criminal penalty, there may well be a valid defense. For example, if you have a contract to hold a large party at a local restaurant, that contract may be impossible for the restaurant to comply with as a matter of law.
Illness
Illness is also a recognized factor that may permit an impossibility defense or justifiable delay. If personal performance by you is required, or if an illness has caused quarantine of your place of business at which performance is required, this may also trigger a valid defense to a contract claim. Note, though, the law will usually require performance, even delayed performance, if it is eventually possible. It remains unclear whether a voluntary quarantine will be considered an ‘illness’ justifying contract delay, but these arguments will most certainly be raised and subject to litigation.
Change in Character
Virginia law has recognized that where performance of the contract becomes impossible due to the fortuitous destruction or ‘change in character’ of something to which the contract is related, failure of performance may be excused. This factor is a bit more difficult to provide concrete examples, but if the very purpose of the contract has been effectively rendered worthless or impossible because of the substantial changes in behavior due to pandemic, the contract performance may be excused as a matter of law.
Conclusion
As with most civil disputes, if there is a way for parties to work out a reasonable resolution to any performance delay, or an agreement as to a contract’s completion, this is always the preferable result. Landlords should be encouraged to actively discuss realistic temporary lease revisions with tenants. Since most landlords have lender financing on their properties, there are limits on what a landlord can do to assist a struggling tenant and still maintain compliance with its loan covenants. We are working with our landlord clients to assist in the review of the loan documents and come up with solutions to satisfy both lenders and struggling tenants. There are also a number of items to include in any lease amendment that protects the landlord now and in the future if they decide to offer tenants rent abatements and/or relaxations of certain lease covenants. Likewise, in purchase contracts, both sides should reasonably expect minor extensions in closing timelines, and owners and builders should understand that construction timelines may well be affected by the pandemic.
As shown above, the legal landscape is evolving rapidly as both governments and the courts struggle to deal with this pandemic and its impact on our economy. Our lawyers are making every effort to stay on top of it. There are a number of steps our clients can take to improve their legal positions under existing contracts and we would be pleased to assist and discuss your options.
For any litigation matters, please contact:
(703) 680-4664
