Some people may be looking to enact force majeure or act-of-god clauses in contractual agreements due to COVID-19. However, the pandemic may not meet the requirements of force majeure and might not relieve parties from contractual obligations.
“The Covid19 situation is an “Act of God,” but not all “Acts of God” excuse a party from its contractual obligations,” Kenneth Fields, a partner at Greenberg Glusker,” tells GlobeSt.com. “The threshold question is whether the particular act—in this case the COVID19 situation—actually prevents a party from performing its contractual obligations. If the answer to that question is no, then the analysis is over and the party must perform those obligations. If the answer to that question is yes, then the parties must review their contract to determine whether it includes a so-called force majeure provision and, if so, what obligations that provision might excuse, or if the contract does not contain such a provision, what obligations might be excused under applicable laws.”
Fields uses the example of retail tenants forced to shutter temporarily, which could excuse them from operational responsibilities outlined in the lease. “A tenant who must temporarily close the doors to what is considered a “non-essential” business should be excused from complying with a continuous operation clause contained in its lease,” he says. “However, analyzing a tenant’s obligation to pay rent will be more difficult, and will depend greatly on the specific language contained in the parties’ lease or applicable laws. The parties must also consider whether a financially strong guarantor has guaranteed the tenant’s obligations under the lease.”
Owners that do not have force majeure clauses aren’t totally out of luck. There are also local and state laws regarding acts of god in contracts. “The parties must review state and local laws to determine whether laws exist to excuse performance based on force majeure or impossibility,” says Fields. “For example, parties in California could look to California Civil Code 1511, which may excuse performance of a party’s contractual obligations, “when it is prevented or delayed by operation of law” or by an “irresistible, superhuman cause.”
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While some contracts may not have addressed this particular issue—which is unprecedented—Fields is adjusting future contracts. “We are already including COVID19 provisions in some of our agreements, and I expect that those provisions will expand to cover similar unanticipated situations that will occur in the future,” he says.