Coronavirus and Commercial Agreements

From Helsell Fetterman’s COVID-19 Response Group

We are receiving many questions about continuing to perform contract obligations in the face of the COVID-19 outbreak, “stay-in-place” and like orders, and the dramatic economic consequences that have resulted from the outbreak and orders. These FAQs touch upon the most common questions we are receiving.

What is a “force majeure” clause and does it apply to the current COVID-19 outbreak?

A “force majeure” provision is often found in a contract to identify certain circumstances or events that may excuse performance or even terminate a contract altogether. Common “force majeure” events include natural disasters, wars, acts of God, and such other events that make it unreasonable or impossible to perform under the contract.

Depending on the language of the provision, the current COVID-19 outbreak may qualify as a force majeure event under:

Express language, e.g., “pandemic”, “epidemic”, “disease”

Umbrella language, e.g., “natural disaster”, “governmental actions”, or “inability to obtain” necessary labor, materials, equipment, etc.

“Force majeure” provisions typically require notice to the other party and reasonable measures to mitigate the effects of the force majeure event. Carefully review your agreement for whether there is a “force majeure” or like provision and the specific wording, requirements and/or conditions to excuse performance.

What if “force majeure” does not apply?

Under Washington law, parties may be excused from performing obligations and responsibilities under the contract principle of impossibility. To excuse performance, a party must demonstrate either actual impossibility or extreme and unreasonable difficulty, expense, or loss. This means that if performance is still feasible (even if more expensive), the principle does not apply.

Depending on the contract terms, the defense of impossibility may apply to excuse performance. For example, “stay at home” and other state-mandated social distancing orders have effectively closed business to the public and such orders may in certain cases amount to such impossibility. However, if such an order is temporary (as most currently are) in duration, then performance may only be excused during the effective period of the order, and a party may still be required to perform under the contract as soon as it is reasonably possible to do so again. In the end, the analysis will be fact specific depending on the terms in the contract and the circumstances and consequences faced by each party to the contract.

Does “force majeure” apply to performance of rent obligations?

It is rare for “force majeure” provisions to excuse a tenant’s obligations to pay rent except in rare circumstances, such as if the force majeure event causes actual damage or destruction to critical leased space. Even then, some lease agreements will indicate specific and limited relief, such as rate abatement proportional to the unusable leased space.

The best course of action is for a landlord and its tenant(s) to communicate with each other concerning the tenant’s ability to pay rent, and where rents cannot be paid, to discuss and negotiate alternatives to rent payments (and more precisely, rent defaults), such as extensions to pay rent; deferred rent with a payment plan; exercise of an early extension option with amended terms; and more. Tenants should be prepared to provide up-to-date financial information showing the adverse economic impact to help reassure your landlord of payment, and to assess operating costs for any reductions in light of reduced activity.

Negotiate with the future in mind

These are uncertain times and there are new developments nearly every day. While Congress passed the CARES Act to provide $350 billion in loans to small businesses, it is not a simple or immediate solution for businesses struggling in response to COVID-19. Lenders are just beginning the process of granting loans – and are already overwhelmed with applicants. Normally, the SBA processes roughly 60,000 loans annually. On the first day of the Paycheck Protection Program on April 3, 2020, banks reported tens of thousands of applications. Unfortunately, financial relief is going to take time. As a result, it is important to continue communications with the other party involved in your commercial agreements and negotiate terms to mutually benefit everyone and help mitigate losses.

Helsell Fetterman is ready to assist and counsel small businesses in addressing the myriad issues arising out of COVID-19, from negotiating new contract terms and responding to the outbreak, to workplace safety, unemployment and compensation, and business and individual planning for the future. We are here to help and support our local business community.