MORE THAN JUST FORCE MAJEURE – Key Contract Provisions to Consider in Light of COVID-19
In efforts to slow the spread of COVID-19 and “flatten the curve,” jurisdictions around the nation have instituted recommendations and restrictions on public gatherings and movement of people within their jurisdictions. On March 19, 2020, Texas Governor, Greg Abbott, issued Executive Order No. GA 08, effective as of 11:59 pm on March 20, 2020, and ending at 11:59 pm on April 3, 2020, that prohibits or restricts certain movement and gathering of people within the State. Subsequently, several Texas counties and even a few municipal governments have issued similar or more restrictive orders for residents within their boundaries to stay at home, shelter in place and/or take certain precautions in any movement outside of their residences and in public spaces that impact the ability to conduct business. A list of certain jurisdictions in Texas with links to the COVID-19 related orders issued by them can be found on the Texas State Bar’s website. Additional executive orders have been issued by Governor Abbott mandating 14-day quarantine for persons arriving from New York Tri-State areas and New Orleans on March 26, 2020 (See Executive Order No. GA-11), mandating a 14-day quarantine for road travelers arriving in Texas from any location in Louisiana on March 29, 2020 (See Executive Order No. GA-12), and effective as of 12:00pm, March 30, 2020, Governor Abbott expanded the Executive Order GA-11 to include mandatory 14-day quarantine of travelers from California, Louisiana, Washington, and the cities of Atlanta, Chicago, Detroit and Miami (See Press Release regarding the expansion of Executive Order No. GA-11 here).
While we can be certain that more orders similar to these will be issued by jurisdictions and these existing orders may also be amended as the threat of COVID-19 persists, the restrictions and limitations and gatherings of people and activities and requirement of the closure of businesses deemed “Non-Essential” leaves much uncertainty for parties to contracts, including commercial leases.
There has been much focus in legal and business circles on the interpretation and invocation of Force Majeure provisions in contracts. However, in light of these recent governmental orders, parties may want to check specific terms in their agreements outside of the Force Majeure provisions to determine whether these governmental orders mandating the closure of businesses and cessation of business activity potentially trigger any rights or remedies under other contract provisions. This determination will depend on the specific language in your contract, but certain rights to abate contract obligations or termination rights may arise by the specific terms of your agreement related to condemnation or taking, or in connection with a contacting party’s inability to satisfy certain conditions precedent to the performance of the other party’s contractual obligations.
A condemnation or a taking of private property for public use without just compensation is a violation of rights afforded under the United States Constitution. While condemnation is typically thought of in terms of a physical taking of possession of the private property by the government, case law has also considered condemnation to include regulatory takings by a government where property owners (as well as tenants and licensees) remain in possession of the property, but with substantial restrictions on the use or enjoyment of their property rights. Contractual provisions governing a parties’ rights and obligations under a lease or license, in the event of condemnation, are common.
If the specific language in the contractual provision does not require a determination that a legal condemnation or taking has occurred or that physical possession has been acquired by a governmental entity, but rather generally refers in relevant provisions, to any governmental action that prohibits the intended use of the property that is the subject of the contract (i.e. retail sales to the public), and orders issued by the applicable jurisdiction where the contract is to be performed prohibit and prevent that business activity from occurring, then the parties may have an argument that the rights and remedies under applicable condemnation or takings provisions may apply to a party’s ongoing performance during the period of the taking.
Additionally, a contracting party’s obligation to perform certain duties may be interrupted or prevented entirely as a result of Stay at Home orders issued by the jurisdiction in which performance is to take place. If this party’s impeded obligation is a condition precedent to future obligations of such contracting party or to the obligations of the other contracting party, those future or other party obligations may arise to an abatement right or termination right under the express contract terms. For example, if a party’s performance obligation requires that the other party provide physical access to a location, and orders issued by the city or county in which that location is located require closure and prohibit entry to such location, the contract may include terms that allow for termination of the contract or abatement of the performance obligation until the location is accessible.
There may be other common law arguments available to provide parties to a contract with some relief or abatement of their contractual obligations. You should review your contract in full and consult with your attorney to examine what rights or potential remedies you may have under your agreements.
For additional information and helpful references, please see CISA Critical Infrastructure Guidelines issued by the Director of the Cybersecurity and Infrastructure Security Agency of the United States on March 19, 2020.