Whether you’re looking at a commercial lease agreement, product delivery schedule, or manufacturing timeline, COVID-19 has probably disrupted your Philadelphia area business operations in one way or another.
What do you do when the disruptions caused by the novel coronavirus are so major that they fundamentally change your ability to perform on a contract? Is there any way to get out of your contract without being on the hook for the other party’s damages?
Enter force majeure, which means “major force” in French.
Force majeure describes an outside event or circumstance that makes the terms of your contract practically impossible to perform. Many contracts have a force majeure clause that excuses failures or delays in performance.
If your contract doesn’t include a force majeure clause, you can still be excused out of your obligations by arguing impossibility, impracticability, or frustration of purpose.
This is our fourth post in our COVID-19 series, where we discuss the challenges businesses face in a dramatically shifting economic landscape. You can also read about:
COVID-19 and Force Majeure Clauses
Depending on where your business operates in the Philadelphia area, you’ve had to keep up with an ever-shifting patchwork of state and local laws passed in response to the pandemic.
Not only are the many changing business requirements difficult to follow, but they're also out of your control. You may no longer use the beautiful new office space that you just signed. If your business is in person, your ability to earn income may be frozen while your rent comes due. If you’re in manufacturing, your supply chain may have dried up or skyrocketed in price. If you work in the event industry, your schedule might be completely erased.
Force majeure clauses usually contain language referring to “acts of God” that interrupt your ability to fulfill your side of the contract. Some causes remain vague, without stating what those circumstances might look like. Other force majeure clauses go into much more detail about what they cover and include a list of catastrophic events.
Your force majeure clause may cover fires, flooding, storms or other extreme weather, coup or revolution, acts of mass violence, riots or war, civil upheaval (but not labor strikes), and any other event “beyond the reasonable control” of either party to the contract. If a force majeure event occurs, your clause might specify whether you can:
Force majeure language referring to pandemics and outbreaks of disease tends to be rare, although that’s likely to change now with the effect of coronavirus on the world.
Will Your Force Majeure Clause Cover COVID-19?
That depends. If pandemics or disease outbreaks are covered under your force majeure clause, then you're in luck. But if your clause doesn't mention pandemics, the language would get reviewed by a judge whose interpretation is based on the laws in their local jurisdiction.
The more detailed and specific your force majeure clause, the more likely it is to be interpreted narrowly to cover only the events listed. For example, if your clause mentions ten different types of catastrophic events but leaves out pandemics, it may not apply to COVID after all.
On the other hand, the vaguer your force majeure language, the more broadly a court will interpret it in court. Does COVID-19 classify as an “act of God” beyond human control? Certainly, none of us a year ago could have reasonably predicted where the world is now. At this time, the pandemic is still too new for a court to have ruled on this question.
To successfully get out of a contract under force majeure, you must show that:
Unforeseen circumstances that simply make performance difficult or more expensive than expected do not fall under force majeure. If you wonder about the outcome of your case, that would depend on the specific facts of your situation.
An experienced local business lawyer can help you analyze the facts of your case and make the best argument for your company moving forward.
Impossibility, Impracticability, or Frustration of Purpose
If you have no contract or your contract doesn’t have a force majeure clause, you can argue impossibility, impracticability, or frustration of purpose to get out of your obligations. Both Pennsylvania and New Jersey courts recognize these doctrines.
Impossibility or Impracticability
Under common law, if your contract becomes impossible for you to perform, you can’t be held liable for breaching its terms. For example, it might be impossible for a dancer who suffers a broken leg to perform at the date and time specified in their contract.
Depending on your local government’s response to the pandemic, shutdown orders could actually make it impossible for some companies to do business. A local theater might be unable to operate their venue at any capacity under social distancing ordinances.
Under impracticability, you can argue that the terms of your contract have become “excessively burdensome” because of a supervening event that is:
A local business law attorney can look at the terms of your contract and help you determine what you can expect based on these arguments.
Frustration of Purpose
What if you can technically complete your contract but the terms have become meaningless?
Consider a company that contracts to clean an event venue that’s shut down during COVID-19. Technically, the contractor can still come and clean the venue. But the reason the cleaners were hired to begin with no longer applies since events are canceled.
In this case, a superseding event frustrates the purpose of the contract. Completing the contract in its original terms would be worthless.
At Holmes Business Law, our Philadelphia area attorneys are dedicated to helping businesses not just survive but thrive in a post-COVID world. We can help you understand your contract options and choose the best strategy to meet your goals.
We know you’ve worked hard to build your business to where it is today. The best way for your company to get through the coronavirus pandemic is with the support and guidance of a legal expert.
Call our business law firm today at 215-482-0285 for a consultation.
The coronavirus pandemic has upset nearly every aspect of the way the world does business. Most non-essential businesses in the Philadelphia area have started to operate remotely since the pandemic hit. Non-essential employees have been telecommuting from home. Many retail companies have shifted to delivery only.
Depending on the severity of local COVID-19 outbreaks, some non-essential businesses have even had to shut down completely under county or township law.
What do you do when you’re tied to a commercial lease for space you can no longer use? Many businesses have had to cut costs as revenue has fallen. A high rent payment on your balance sheet now could jeopardize your company’s survival.
Business owners facing these types of drastic changes are justified in wanting out of their commercial leases. Can you get out of your lease because of the pandemic?
The answer is: possibly. Most commercial leases require that you pay a penalty fee for early termination. But landlords haven’t been immune to the effects of the pandemic. If your commercial landlord faces a high number of vacancies with a low chance of finding new tenants anytime soon, they may be more willing to negotiate better lease terms for you.
Every commercial lease is unique. The only way to know your options is to go over the actual terms of your lease – preferably with the help of an experienced local business lawyer. Holmes Business Law Firm is dedicated to getting the best terms possible for our clients. Call the Philadelphia offices of Sarah Holmes today for a consultation at 215-482-0285.
Important Terms for Terminating Your Commercial LeaseWhen reviewing your commercial lease, look carefully at any language discussing how your lease could end. Clauses to look for include:
Your commercial landlord may be sophisticated and experienced, with many properties and lease agreements. They may be represented by professional property management companies. When approaching your landlord about terminating your commercial lease early, you must be prepared to back up your request with financial documentation and proof of hardship.
At the same time, you have to consider that your commercial landlord may not necessarily have deep pockets. They also have bills like payroll, utilities, and taxes. Their property may get foreclosed if they fail to make their mortgage payments on time.
As a result, a commercial lease early termination can be a delicate negotiation. Even if you've had a good relationship with your landlord in the past, you don't want to ruin it now.
To get the best results for your business, you should evaluate where you stand legally and financially with an experienced business lawyer. Consider:
Call our Philadelphia area law offices now at 215-482-0285 for a consultation with an experienced lawyer dedicated to helping your business thrive.
Sarah E. Holmes is a Philadelphia business attorney and strategist that helps start ups and established businesses looking to expand, protect their assets and increase their profits in an approachable, down-to-earth way. When you're looking for a business lawyer in Philadelphia, the Main Line or New Jersey, we can help.