The COVID-19 pandemic has forced many individuals and businesses to uproot themselves from their normal workplaces and find new quarters at home to continue to earn their living and/or just to remain safe. Such an undertaking has forced these individuals to duplicate their business needs while leaving their office space and/or retail store empty and unused during the duration of the Stay at Home orders.
Who is legally required to bear the brunt of the financial impact of the inability of businesses and individuals to utilize their offices and stores while the government has banned us from going to our physical work space? Who must pay for copy machines, CAM charges, water delivery, and the host of other contracted services and machinery that cannot legally be used because businesses have been deemed non-essential under the Governor’s mandate?
There are a number of legal doctrines that may apply to your situation and shift the financial burden from tenants to landlords, from businesses to property owners, and from clients to their vendors and service providers. These doctrines are: (1) impractibility; (2) act of God; and (3) force majeure.
- Impractibility. A contract becomes impracticable when its performance becomes excessively and unreasonably difficult or expensive:
In the absence of statute or case law on the subject [of performance under a contract], . . . courts often look to the Restatement (Second) of Contracts (the “Restatement”). . . . [The Restatement] § 261 does provide for discharge of contractual duties by reason of supervening impracticability. . . . Section 261 states:
Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.
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In defining the impracticability defense, courts have held that a contract becomes impracticable when its performance becomes excessively and unreasonably difficult or expensive. . . . [However] . . . “the unforeseen cost increase that would excuse performance ‘must be more than merely onerous or expensive. It must be positively unjust to hold the parties bound.’ . . .
OWBR LLC v. Clear Channel Commc’ns, Inc., 266 F. Supp. 2d 1214 (2003).
a. Excuses for nonperformance – Prohibition or prevention by law
If the performance of a duty is made impracticable by having to comply with a governmental regulation or order, that regulation or order is an event, the nonoccurrence of which was a basic assumption on which the contract was made. A contract or lease is not considered “impaired” by a law in force when the contract was made, since it is presumed that the contract was made in contemplation of that existing statute, ordinance, or other law. Federated American Ins. Co. v. Marquardt, 108 Wash. 2d 651, 741 P.2d 18 (1987). So, in order to argue that the current Stay at Home orders render a lease impracticable, one needs to show that the Stay at Home orders were not in effect at the time that the lease was entered into.
- Act of God. The case law surrounding the act of God defense to the obligation of performance under a contract (or lease) has not been consistent. However, some courts have treated disease and illness as an act of God. e.g. Stillwell v. Aberdeen-Springfield Canal Co., 102 P.2d 296 (1940). When illness is deemed to be caused by an act of God, the illness or disease must render the performance obligation impossible in order to excuse performance. So, we still need to evaluate the illness or the government decree issues as a result of a pandemic to determine if it made it impossible to utilize a leased space or to pay a mortgage or rental payment.
- Force Majeure. Some leases and contracts contain force majeure Such provisions speak to unforeseen circumstances that are not created by the parties to the lease or contract, which render at least one of the party’s performance impossible. Some of these provisions are very specific and some are more general. An example of a general force majeure provision is the following:
(a) Except with regard to a Party’s obligation to make payments under this Agreement, in the event either Party hereto is rendered unable, wholly or in part, by Force Majeure to carry out its obligations, upon such Party’s giving notice and full particulars of such Force Majeure as soon as reasonably possible, such notice to be confirmed in writing or by facsimile to the other Party, such obligations of said Party will, to the extent they are affected by such Force Majeure, be suspended during the continuance of said inability.
(c) “Force Majeure” means an event that (i) is not within the control of the Party relying thereon and (ii) could not have been prevented or avoided by such Party through the exercise of due diligence.
Emphasis added. TransAlta Centralia Generation LLC v. Sicklesteel Cranes, Inc., 134 Wash. App. 819, 824,142 P.3d 209 (2006). An example of a more specific force majeure clause is the following:
Neither party shall be liable to the other for any failure or delay in performance under this Agreement, occasioned by war, riot, government action, act of God or public enemy, damage to or destruction of facilities, strike, labor dispute, failure of supplier or workers, inability to obtain adequate newsprint or supplies, or any other cause substantially beyond the control of the party required to perform.
Hearst Commc’ns, Inc. v. Seattle Times Co., 154 Wash. 2d 493, 508, 115 P.3d 262 (2005).
If you or your business has been impacted by the fallout from Covid-19 and the government restrictions instituted to “flatten the curve”, you should assess whether you must bear the financial brunt of the inability to carry on business as usual. Examine your leases and contracts to determine if there are force majeure provisions contained in the documents, and evaluate whether the doctrines of impractibilty and impossibility provide you with legal excuses to your performance obligations under the leases and/or contracts.
Stay Safe Out There!