With the COVID-19 pandemic raging, businesses are concerned about whether this event will excuse their performance of agreements they entered into prior to the pandemic, and with the beginning of a new month fast approaching whether to pay the rent on their leases, while landlords are engaged in the same thought process of wondering if the rent checks are going to timely arrive. That dilemma is especially acute in places like California, with Governor Newsom’s stay-at-home order made on March 19 and its impact on all businesses and the rapidly emptying commercial and non-essential retail space.
Notwithstanding today’s earlier enactment of the $2 trillion stimulus package and the inclusion in that legislation of federal government funding programs assisting both “eligible” and small businesses, consideration needs to be given to the contract terms in all of your business contracts to issues excusing performance. The contract term that is now on everyone’s’ lips is the boilerplate term often referred to by its French name, called “Force Majeure” literally meaning “superior strength” and oftentimes incorrectly referred to as an “Act of God”. What you need to do, first, is to carefully understand the terms of your agreements, especially your commercial/retail lease and if there is a “Force Majeure” clause contained in it, to further determine how that clause and others within the applicable agreement may allow one party’s performance of a contract to be excused, either totally or partially.
In California, that is just the beginning of the analysis: For nearly 150 years an obscure law has remained on the books. The law is simply titled “Causes excusing performance,” is found in the California Civil Code (§1511) and provides in all its splendor: “The want of performance of an obligation … in whole or in part, or any delay therein, is excused by the following causes, to the extent to which they operate: … When it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary …”
With the weight of California case authority suggesting that an “irresistible, superhuman cause” means an “Act of God,” that likely compels an analysis whether COVID-19 and the pandemic is, or is not, an “Act of God”. And in this upcoming Holy Season, not surprisingly the short answer is maybe yes, maybe no. There may be other terms in the agreement that would help in this analysis. While beyond the scope of this brief article and however one may perceive the precise origins of this terrible super-virus, the human spread and contagion don’t seem too God-like, but rather are clearly rooted in human actions. But look, the statute operates to excuse contract performance qualified by the following key nine words “unless the parties have expressly agreed to the contrary …” That then begs the question as to what is an express agreement to the contrary? Must the contract drafters have anticipated a flu-like pandemic, or what about some other type of pandemic?
Added to the analytic mix are additional principles of California contract law, specifically legal doctrines that further operate to excuse performance called “impossibility/impracticability” and “frustration of purpose”. In the former, contract performance may be excused when it is either not practicable or would require excessive and unreasonable expense, not already contemplated by the parties in their contract. In the latter, performance is excused if the purpose for entering into the agreement has been frustrated by a change in circumstances, eg., a stay-at-home order issued by the Governor that results in office/retail space being vacated.
If you have questions regarding a Force Majeure clause in your lease contract, please contact our COVID-19 Task Force - .
