Legal Insights

COVID-19 and Small Business

By: August 7, 2020

Our many small business clients are experiencing the effects of the COVID-19 pandemic on commerce —locally, nationally, and especially globally. The pandemic has presented unprecedented challenges to commercial landlords and tenants alike, either enforcing contractual lease provisions or in meeting those obligations. Only time will tell how courts and other alternative dispute resolution forums will ultimately decide the resulting pandemic related lease issues—namely, the application of force majeure clauses, and other contractual defenses such as impossibility of performance and frustration of purpose.

What is a force majeure clause?

A force majeure clause is “[a] contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially 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 clauses are often included in contracts, and –at least until COVID-19 — may have been considered essentially boilerplate language to protect the parties from unforeseeable or uncontrollable events. Depending on the exact wording of such provisions, they may excuse performance when an “act of God” or other unforeseeable event like fire, war or riots occur—but normally would not extend to buffer a party against the normal risks of a contract.

So does a force majeure clause cover pandemics, such as COVID-19?

Sometimes carefully drafted force majeure clauses include disease, illness or quarantine, for example. Rarely do they include any specific viruses, but it will be no surprise to see more specifically drafted clauses in the future—both to limit a tenant’s exposure and to protect the landlord—each side vying for the upper hand. But even where a particular event is not expressly mentioned in a force majeure provision, COVID-19 could trigger another act that is specified such as governmental act or order that renders performance illegal or impossible. Some courts could decide that the list of events in the governing lease or contract reflects an intent to exclude other events. Some courts will be likelier than others to agree that a particular event is “unforeseen”. After COVID-19, contract drafters will think differently about this clause: a provision that includes specific reference to COVID-19 or other epidemic or pandemic will be easier to enforce than one that does not.

Might other lease or contract defenses apply to excuse nonperformance?

Even if a lease or other contract does not contain a specific force majeure provision, other defenses could apply, such as impossibility of performance or frustration of contractual purpose. According to case law, after a contract is made, if a party’s principal purpose is substantially frustrated or impracticable (without his fault), his remaining duties to render performance can sometimes be excused or at least delayed. Similarly, if performance is rendered illegal, performance may be excused as well.
While these legal issues are novel and interesting in the context of COVID-19, as a small business client experiences these challenges, the most important goal is to develop innovative legal solutions to “stop the bleeding” for each party. Especially with so much suffering in all sectors of business and society in general, courts will be looking for parties to creatively resolve their disputes.