March 2020

The COVID-19 pandemic and Governor Newsom’s “stay-at-home” order create challenges for businesses and landlords in California. As a result, parties to contracts could seek to delay or terminate their obligations. This article discusses some of the legal concepts with respect to delayed or excused contract performance.

Please note that federal, state, and local regulations, laws, and ordinances may override the common law and contractual principles discussed in the article.

Contract Provisions

Force Majeure

A “force majeure” provision in a contract allows a party certain rights if a given event arises. For example, a contract’s “force majeure” provision might allow a construction company to temporarily stop construction of or repairs to a building in the event of a hurricane, a riot, or governmental mandates in connection with a pandemic that impacts their work.

Generally, for a party to invoke “force majeure”rights under a contract, the contract must:

1. contain a “force majeure” provision;
2. the provision must specify the event (e.g. a hurricane or a pandemic) that the party is using as the basis for “force majeure”; and
3. the provision must allow the party the right they wish to exercise (e.g. delay construction for the duration of the hurricane).

A party cannot invoke “force majeure” under their contract without having a specified right to do so—and complying with the underlying language related to that right (such as notice etc.). And, because “force majeure” contract provisions may limit the type of qualifying events, or limit the parties’ rights that arise under a qualifying event, COVID-19 may not enable a party to invoke “force majeure” as a defense. [1]

Condemnation

Absent specific language to the contrary, a “condemnation” provision in a contract (frequently leases) refers to a governmental order formally declaring the building or premises condemned, and allowing the parties certain rights as a result of the condemnation.

Generally, a party cannot invoke a right under a condemnation provision unless: i) the premises or building is condemned (requiring governmental action), and ii) the right is specified in the contract as a result of the condemnation.

Casualty

Absent specific language to the contrary, a “casualty” provision in a contract generally refers to the parties’ rights with respect to physical damage or destruction of the property. For example, if a hurricane damaged a building occupied by one party to the contract, the casualty provision might address repair and insurance responsibilities between the parties with respect to the damage.

Generally, a party cannot invoke a right under a casualty provision unless: i) the premises or building is physically damaged, and ii) the right is specified in the contract as a result of the physical damage.

Common Law Defenses

Impossibility

“Impossibility” refers to a party’s inability to perform under the contract because doing so is impossible. The “impossibility” refers to the obligation that must be performed under the contract, and not on the party’s inability to perform the obligation. For example, if a party hires another to perform services, the hired party dies, and the deceased hired party cannot be replaced by another person, then a court could find that the contract has terminated. Whereas, if a replacement for the hired party could be found, a court might find that the contract remains enforceable.

Frustration of Purpose

Similar to “impossibility”, “frustration of purpose” refers to an unforeseen circumstance (generally a risk or event that the parties could not have contemplated and did not otherwise provide for its occurrence via contract) that substantially destroys the value of performance to one of the parties.

The “frustration” must be severe and not reasonably foreseeable. Mere financial loss or lack of profitability as a result of the event may not be sufficient.

Statutory Defenses or Governmental Orders

A party may also invoke a statute, regulation or ordinance as a basis for avoiding performance under a contract. Throughout the COVID-19 pandemic, local, state and federal governmental authorities will issue directives excusing or delaying some contractual obligations or performance.

The party invoking the statute, ordinance, regulation, or governmental directive may be required to notice the other party as to their intent to utilize the statutory/governmental defense, or provide supporting documentation to the other party. In other cases, no notification or proof is required. Regardless, the party invoking the statutory or governmental defense will need to ensure the defense applies to their specific circumstances in order to utilize it.

Negotiation and Amendment

Finally, parties may modify a contract between them if they mutually agree to amended terms. Many contracts require that any modifications be written and signed by both parties. While not a defense, parties may utilize negotiation and the amendment process to resolve disputes between them and potentially avoid the necessity of invoking contractual defenses.

KTS attorneys are available to assist with pandemic-related contract issues. Please contact us as info@kts-law.com.

Kimball, Tirey & St. John LLP is a full service real estate law firm representing residential and commercial property owners and managers. This article is for general information purposes only. While KTS provides clients with information on legislative changes, our courtesy notifications are not meant to be exhaustive and do not take the place of legislative services or membership in trade associations. Our legal alerts are provided on selected topics and should not be relied upon as a complete report of all new changes of local, state, and federal laws affecting property owners and managers. Laws may have changed since this article was published.  Before acting, be sure to receive legal advice from our office. For contact information, please visit our website:  www.kts-law.com.  For past Legal Alerts, Questions & Answers and Legal Articles, please consult the resource section of our website.

© 2020 Kimball, Tirey and St. John LLP

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[1] For example, many “force majeure” provisions do not excuse timely payment of rent or other amounts due under the contract.