Effect of the Coronavirus on Contractual Obligations in California

This entry was posted on Wednesday, March 25th, 2020 and is filed under Uncategorized.

In these uncertain times, it is vital that businesses be proactive in assessing how these restrictions and other changes caused by the Coronavirus will affect their operations.  One significant consideration is how existing contractual rights and obligations will be affected. This will require a careful review of the terms of any existing contracts, as well as an analysis of whether the contractual purpose can continue to be accomplished.

The effects of the Coronavirus or COVID-19 are being felt in all areas of the economy of California. Governor Gavin Newsom has directed that all restaurants and bars should cease dine in operations and that health clubs, movie theaters and other venues should close.  More restrictive directives were issued in San Francisco and the Six Bay Area counties ordering that residents “shelter in place for three weeks and ordering businesses which do not supply “essential services” to cease operating. A copy of one of these orders is available at https://www.sfdph.org/dph/alerts/files/HealthOrderC19-07-%20Shelter-in-Place.pdf.  It is anticipated that additional restrictions will be put in effect, which will further limit the ability of businesses to operate.  

In these uncertain times, it is vital that businesses be proactive in assessing how these restrictions and other changes caused by the Coronavirus will affect their operations.  One significant consideration is how existing contractual rights and obligations will be affected. This will require a careful review of the terms of any existing contracts, as well as an analysis of whether the contractual purpose can continue to be accomplished.

Contract Clauses

Terms such as “force majeure” or “Act of God” are often used in contracts to set forth the circumstances under which a party may be relieved from performance if events beyond the party’s control render performance impossible. While such clauses are often considered to be “boilerplate” and are usually overlooked, the language used in these clauses can be very important in determining the rights and obligations of the parties in the present environment. If your contract explicitly uses terms such as “disease,” “epidemic,” “pandemic,” “quarantine,” “act of government” or “state of emergency,” you will have a better argument that you can avoid your obligations under the agreement.  However, many contracts do not include these terms and instead used more general ones. Absent specific contractual language, it would be up to a court to determine whether the Coronavirus pandemic, or the restrictions put in place to deal with it, qualify as a “force majeure” or “Act of God” as defined in a given agreement. 

Accordingly, the first step in assessing how to proceed will be to carefully review the exact language used in the agreement at issue, bearing in mind that courts narrowly construe these types of clauses if a party is seeking to excuse nonperformance.  

Excuses for Non-Performance

In addition to looking at the actual language of the agreement, a business should also examine whether it could be excused from performance by claiming impossibility or impracticability. If a party’s performance under a contract is made impracticable by something outside of that party’s control, the duty to perform may be excused depending on the circumstances.  To successfully make this argument, it would not be enough to show that the changed circumstances make performance more difficult, expensive, or unprofitable. The burden of proof in raising this defense is a heavy one, and the party seeking to establish that performance is impracticable or impossible would need to prove that the Coronavirus and resulting events are an unanticipated circumstance that has made performance of the contract significantly different than was anticipated by the parties at the time that the parties entered into the contract. Although absolute impossibility would likely not be required, a business would need to show that performance is effectively impossible and also that it has taken every reasonable and available action to perform as required.

What You Can Do

It is essential that you immediately review any contracts to identify the controlling language and determine whether it specifically addresses a pandemic.  You also need to assess whether the contract contains any notice requirements or deadlines that you may need to comply with if you are seeking to avoid performance. Failure to satisfy any notice requirements or meet any deadlines could result in a waiver of any rights to avoid performance that may exist.  You should also determine whether you have taken all steps to allow performance under the contract, even if those steps are difficult or expensive. 

Responding to the challenges presented by the Coronavirus pandemic will require careful consideration on your part.  Because it is uncertain how courts will handle cases where parties contend they were excused from performance under a contract, determining the best way to proceed will require a careful weighing of all the various factors at issue.  

If you have any questions about your rights and obligations under existing contracts, or wish to discuss any other issues related to how the Coronavirus and resulting changes are affecting your business, we are here to discuss your concerns and help you decide on the best way to proceed.