Legal Life after the Coronavirus Death for Small Businesses, Franchisees and Dealers
By: Jeffrey M. Goldstein www.goldlawgroup.com
Second in a Series: COVID-19 HAS KILLED MY BUSINESS – MAY I LEGALLY TERMINATE MY CONTRACTS?
Those who hope or believe that the consequences, effects, and sources of COVID-19 will soon be arrested and contained might be wondering whether their inability to have complied with their contracts, leases, and mortgages during this waiting period can lead to a subsequent termination of or suit under their agreements for failure to have fully complied with all of the contractual obligations in these contracts. Although I don’t anticipate that ‘other parties to your contracts’ individually or as a group are preparing or conspiring to terminate, default, or cancel anyone’s agreements, this does not rule out the high probability that when things return to normal (when market forces begin to work again unimpeded by the myriad current external shocks), every firm will naturally begin to focus again on ‘maximizing profits’ – the legitimate and necessary goal of individual suppliers in a free market economy.
In general, whether you’re able to use COVID-19 as a legal ‘excuse’ for your inability to pay or otherwise perform during the coronavirus downtime is subject to whether the agreement in issue contains a provision or language that excuses your performance for unanticipated or unforeseen events. While many agreements contain such clauses, referred to as ‘force majeure’ clauses (clauses that excuse performance based on unexpected events such as floods, epidemics, riots, wars, etc.), others do not. However, the existence of a force majeure clause is not a ‘get out of jail free card’ as every such clause is subject to detailed and esoteric legal interpretation hinging, in part, on the specific language and wording used, as well as the governing jurisdictional law. ‘Disease’ in one jurisdiction might cover COVID-19, while in another jurisdiction disease could be interpreted so narrowly that it would rule out coronavirus.
From a layman’s point of view, the failure to have fully performed with all contracts, leases, supply agreements, and mortgages during this time of crisis clearly is a ‘good excuse’ for a contracting party’s failure to perform — the precipitous loss of all customers and sources of revenue makes it nearly impossible to make contractual payments due to suppliers, manufacturers, franchisors, distributors, and employees. However, the question is not necessarily one of impossibility of performance; instead, it is one of risk allocation, or which party under the agreement in question ‘agreed’ – explicitly, implicitly, or by law — to accept the costs associated with the occurrence of a future, albeit unlikely, adverse event, such as COVID-19? And, if no party can be said to have agreed to accept such a risk, which party is able to accept that risk at least cost?
Although law professors grapple regularly with trying to reconcile the hundreds of years of cases on this issue, nobody, in my view, has succeeded in doing so. Instead, at best, the prolific decisions by courts in both civil and common law jurisdictions identify a list of potentially relevant ‘hot conceptual issues’ that courts will consider in resolving such inability to perform cases. Unfortunately, these cases do not explain how these criteria should be weighed against each other, or whether any of them is more important than the others. Accordingly, an evaluation of how you will fare in the ‘coronavirus afterlife’ will depend upon the language in your contract, the law in your jurisdiction, the facts in your case, and the talent, aptitude, and creativity of your lawyer.
Below I’ve listed snippets of a broad swath of historical decisions regarding impossibility and force majeure. As noted above, these may – or may not – have relevance to your unique contractual obligations and rights.
- Promoter contracted to rent concert hall. A fire burned down the hall through the fault of neither of the parties. After the fire, the promoter sued the concert hall for ‘failing to deliver’ the concert hall for the concert. The court ruled in favor of the owner of the concert hall explaining that there is an implied condition that performance depends upon the continued existence of the person or thing, and that the destruction of a person or thing excuses performance.
- Under a contract for the sale of soybeans, a supplier was unable to deliver the crops because the horrendous winter weather destroyed the crop. The court ruled that although the weather was an ‘act of God’, and although it destroyed the crop, the supplier nevertheless could have obtained the crops from another farmer or supplier; thus, the farmer’s performance was not excused.
- Shipping transportation firm that was obligated by contract to ship lube oil for Shell corporation was not excused from performing under the contract simply because the cost of avoiding the Suez Canal during a war increased by one-third; further, the Suez Canal was not the exclusive route to perform duties under the agreement.
- Plaintiff failed to make timely deliveries of a large number of processed turkeys in accordance with three supply contracts contending that its problems in delivery arose when it began having difficulties obtaining a sufficient supply of healthy turkeys from its chosen suppliers who were experiencing disease problems. The court held that Plaintiff did not do enough to obtain an adequate supply of healthy turkeys from other sources to meet its contractual obligations – ‘economic hardship’ was not equivalent to impossibility.
- In an action brought by a bus driver to recover the compensation stipulated in a driver’s contract with a school district for the transportation of teachers and pupils to and from a school, where the plaintiff sought to recover payment for a period of thirteen weeks during which the school was closed on account of an epidemic of influenza, the court held that “either party is excused if, without his fault, performance for a period becomes impossible. Such impossibility may arise upon the sickness or death of either party, or the inability of one party to give or receive performance, occasioned by the prevalence of an epidemic.”
When the commendable collective selflessness that exists naturally dissipates, most firms, large and small, will understandably and naturally begin looking to stabilize and bolster their bottom lines; this means that, to the extent you’ve been unable to keep up with payments or other requirements during the coronavirus disaster, you’ll be in the legal line of fire for default, termination, or collection. As a small business, you should use some of your downtime to locate and collect your contracts, leases, supply agreements, and mortgages. After doing so, you should consult with an experienced counsel with expertise in this area to be ready for the ‘coronavirus afterlife.’
Jeffrey M. Goldstein
Goldstein Law Firm, PLLC
(202) 293-3947
Second in a Series: COVID-19 HAS KILLED MY BUSINESS – MAY I LEGALLY TERMINATE MY CONTRACTS?
