COVID-19 Outbreak and Contract Law: Can You Delay Paying Bills?
We are currently facing a public health emergency in America that is unprecedented in modern times. It has led to a massive effort by federal and local governments to encourage people to remain in their homes, limit travel, and shut down a significant portion of all regular commerce. At the time of this article, none of the jurisdictions in the DMV have issued shelter in place orders. However, both DC and Maryland have closed all bars and restaurants, except for processing delivery and pick up orders. Governor Northam, in Virginia, has limited all businesses to hosting no more than 10 patrons at a time. Even with that added leniency, many breweries and other craft beverage producers in Virginia have stopped on premise sales in order to protect their staff and the public from the COVID-19 virus. This has significantly lowered revenue coming into tap rooms and dropped off demand on the distribution side as well. In the midst of this, many businesses are facing some very tough questions around whether they will be able to make their loan and rent payments, or other financial obligations, come next month. Fortunately, there may be a possibility for relief in one of two ways.
Force Majeure Clauses:
"Force majeure" literally means superior force in French. It is used to described a type of common contract provision whereby a party can be excused of its obligations under the contract, if by no fault of the party, circumstances arise that make performance under the contract inadvisable, commercially impracticable, illegal, or impossible. Usually, the language in the clause will include something similar to: "if in the event of war, natural disaster, civil unrest, labor strikes, fire, public emergency, acts of government, or similar event; the obligations of the party under this agreement become [impossible, impractical, financially unviable, etc.] that party may be granted a [delay, excuse, allowance of partial performance] on its obligations.
The force majerue clause in any of your company's agreements, if its exists, will vary in terms of: (1) the scope of events that will trigger the clause (i.e. whether a pandemic and forced state closure of your taproom is an applicable situation); (2) the degree of difficulty that will excuse performance (i.e., is meeting the obligation "impossible," "impractical," etc.). The standard of impossibility is typically very hard to meet; (3) the scope of relief provided (i.e. whether it excuses performance entirely or merely allows for delay or partial performance instead). A pandemic, such as the one we are currently facing, is such a rare occurrence that a specific reference to a public health emergency may not be featured in your contract clause. However, if there is a reference to governments acts, “acts of God,” or a catch all phrase such as “any similar circumstance” your business may be able to seek relief from your lender, landlord, or other counter party under the terms of the contract itself. Even though your on premise and distribution sales are plummeting because of government orders, the virus is the casual event for that order and so may be qualified under any reference to any “act of God.” Generally speaking, plagues are a feature of the Bible.
Common Law Doctrines of Frustration of Purpose/Impossibility and Impracticability:
In the absence of a force majeure clause there are generally applicable common law (judge made) legal doctrines that may provide a legal basis for excusing performance. These are the doctrines of “frustration of purpose,” “impossibility,” and “impracticability.”
Under Maryland law, the frustration of purpose doctrine will discharge a contract where a supervening event or circumstance completely frustrates the purpose of the contract and renders performance impossible (Harford County v. Town of Bel Air, 348 Md. 363, 384, 704 A.2d 421 (1998)). In determining whether the “frustration of purpose” doctrine is met, Maryland courts will consider whether the intervening event was foreseeable, whether the event was an act of government, and whether the parties were responsible for bringing about the intervening event (Id.). The related doctrine of impossibility of performance holds that a contract is rendered impossible, and thus voidable “where performance is subsequently prevented or prohibited by a judicial, executive, or administrative order” (Lane v. Dashiell, 195 Md. 677, 689, 75 A.2d 348 (1950)). In order to succeed in such a claim, performance under the contract must be objectively impossible, not merely difficult or cause undue hardship (Hardford County at 348 Md. at 385). Additionally, the doctrine of impossibility is inapplicable if the party made the promise unconditionally or otherwise assumed of the risk of the intervening event occurring (Fred W. Frank Bail Bondsman, Inc. v. State, 99 Md. App. 227, 232, 636 A.2d 484 (1994)).
Since the doctrines of frustration of purpose and impossibility completely excuse performance under the contract, Maryland courts are incredibly reticent to apply those doctrines. In regards to any loan or lease agreements, Governor Hogan’s order to close all on premise sales would most likely not be a qualifying event. Although it makes the payment of your loan amount and rent incredibly difficult, and changes the business model considerably for the foreseeable future, it does not make honoring those payments objectively impossible, nor does it completely nullify the purpose of entering into the loan or lease agreement itself. However, there may be other sorts of obligations your business has entered into that would make these doctrines available to you.
With all that said, the doctrine of impracticability may provide a better avenue for relief. Under Maryland law, a party can be excused from performance under the contract where certain unforeseen conditions not within a party’s control make performance by that party impracticable (Rockland Indus. v. E+E (US), Inc. Manley-Regan Chems. Div., 991 F. Supp. 468, 471 (1998)). Unlike with impossibility, the doctrine of impracticability applies even where performance is technically possible, but the party seeking avoidance would incur “an excessive and unreasonable cost”(Ecology Servs., Inc. v. GranTurk Equip., Inc. 443 F. Supp. 2d 756, 769 (D. Md. 2006)). In determining whether to apply this doctrine, courts will look to the commercial conditions at the time the contract was entered into and ask: (1) was the intervening event one that the parties could have reasonably foreseen as real possibility that would affect performance under the contract and (2) if so, was it a risk that the parties were implicitly assigning to the promisor by filing to provide for it explicitly (Heat Exchangers, Inc. v. Map Constr. Corp., 34 Md. App. 679, 688, 368 A.2d 1088 (1977)). If the answer to these two questions is no, the contract will no longer govern and the parties are free to negotiate a new agreement amongst themselves. Given the lower threshold for application of impracticability, the unforeseeable nature of the COVID-19 outbreak and resulting public health orders, and the severe financial burden and change in business operations those orders have caused, this doctrine may provide a path to relief under existing loan and lease agreements.
In reality, no one wants to expend the time and cost to go to litigation and potentially enforce or make use of these contract clauses and legal doctrines. I am providing this information in the hopes that it may increase your businesses’ bargaining position if (or when) you decide to negotiate a change in your lease or loan terms. This is an incredibly difficult time for our industry and I genuinely share your concerns and anxiety. Hopefully this information will be useful to you.
Disclaimer: This article does not constitute legal advice nor create any type of attorney client relationship with the author. Your individual circumstances will vary, especially in regards to contract provisions that may supersede any of the content referenced in the article. Please consult with your counsel if you have any further questions.