By Kamil Canale, Esq.
The COVID-19 pandemic is impacting companies and their ability to meet contractual obligations worldwide, and California is no exception.
There are travel restrictions and supply issues. You may be having difficulties fulfilling orders because some of your workforce has become sick or your entire workforce been ordered home because your business is not essential. Whatever the impact COVID-19 may be having on your business, there are many ways in which the pandemic may affect your ability to fulfill your contractual obligations.
Can you get a reprieve from your contractual obligations? To answer this question, you have to look at the contract itself.
Impossibility or Impracticability Clauses – What’s the Difference?
Does your contract contain a clause that excuses your performance for impossibility or impracticability? If performance of the contract is prevented because it is objectively impossible due to a supervening event, you may be excused from performance.
By way of example, if you were contracted to deliver a truckload of toilet paper to San Francisco from Los Angeles by Friday, and the authorities shut down all highways and interstates on Wednesday to try to further curtail the spread of COVID-19, making it impossible for you deliver the toilet paper, you can argue it was impossible for you to make the delivery under the contract.
However, if the authorities only shut down Interstate 5 but you could still deliver the toilet paper if you used the longer route on Highway 101, then it was not impossible to perform. Just because performance is more difficult or more expensive does not make performance impossible.
Impracticability, on the other hand, is when the supervening event has caused performance to be so difficult and expensive that it becomes impractical, though technically possible.
Using the example above, let’s assume again that the authorities have shut down all highways and interstates to restrict travel. Theoretically you could get the toilet paper delivered using side streets and cutting through neighborhoods. This would take five days (versus eight hours) to get the delivery made. Plus, since the truck would not fit under all the local bridges, every time you encountered this issue you would have to off load the truck, carry the toilet paper under the bridge and then load it onto a new truck before continuing on. Assuming you were not mobbed for the toilet paper during this process, you might be able to get the toilet paper delivered. However, under this scenario, one would argue that performance of the contract under these circumstances is impractical and should be excused.
Force Majeure – It’s Not Just a Fancy Latin Phrase
Does your contract contain a force majeure clause? Force majeure clauses have been around for over a hundred years. However, while often included in contracts, we rarely pay much attention to them…until now. Events beyond a party’s control, commonly called “force majeure events,” may prevent a party from performing their obligations under a contract.
As with everything, how the force majeure clause is likely to be interpreted depends upon the language in the clause itself. Force majeure clauses are often included in contracts to remove liability for natural and unavoidable catastrophes such as hurricanes, earthquakes or other “Acts of God.”
If your force majeure clause specifically includes “pandemics,” you are very likely in good shape. However, if the contract does not specifically contain the word pandemic, but there is general “Act of God” wording, it becomes a bit trickier. First, whether a virus that is spread from a bat to a human and then ultimately to the rest of the planet is an “Act of God” will have Darwinists and Religion debating for decades and will likely have to be decided by the courts at some point.
Assuming COVID-19 is found to be an “Act of God,” you may still have to prove causation, i.e., you may have to prove that COVID-19 is the reason you could not get the toilet paper to San Francisco. In our example above, the hypothetical closure of the highways and interstate preventing travel would be Exhibit 1 to explain why the toilet paper could not be delivered. The fact that a national emergency has been declared, that Governor Newsom has issued an executive order that everyone is “Safer at Home” and declared California a disaster area will all lend support to this argument. Again, the impacted party generally has to show that performance is impossible and not just unprofitable or difficult.
Plus, be aware that most force majeure clauses have notice requirements that require the party unable to perform to give the other party notice. When reviewing your contracts, make sure you make a note of when you have to notify the other party that you will not be able to perform.
The date on which the contract was entered into is also important. If you entered into the contract six months ago, when no one had ever heard of COVID-19, you likely have a better chance of enforcing the force majeure clause. However, most force majeure clauses exclude foreseeable problems or events. So if you enter into a contract tomorrow, a good argument can be made that you knew about the pandemic and how it may affect your business, providing you an opportunity to add additional contractual terms to address potential issues which may arise.
As with any contract, if you are having difficulty performing your obligations under the contract, you have a duty to mitigate any damages. This can take many forms. For example, you may have to deliver a smaller quantity of toilet paper that can fit in the back of a smaller truck, the delivery may be late or you may have to hire someone else who can get a truckload of toilet paper to San Francisco on time.
Communication – It’s Always a Good Idea
If you find yourself having difficulty meeting your obligations under a contract due to COVID-19 related issues, it may be beneficial to simply talk with the person you have the contract with and explain the situation. After all, these are unprecedented times and acknowledging the issue and providing a solution to the problem may go a long way towards saving both the contract and your customer relationship. And, if that fails, or you have questions about how one of your contracts may be affected by the pandemic and what the legal ramifications are, please feel free to call us for legal advice on how to proceed.
Our attorneys and staff are currently working from home to do our part to flatten the curve and protect both our health and the community. We hope that you and your employees are all safe and healthy. For those working in essential businesses, we are forever grateful for your hard work during this unprecedented time. Be safe out there!
Kathryn (Kamil) Canale, Esq. is a Partner at Bradley, Gmelich & Wellerstein LLP and is an AV-Preeminent peer rated attorney. She has a broad background of business, employment and litigation experience in both state and federal courts upon which to draw. For over 20 years, she has been known for being an aggressive litigator for her utilization of procedural and substantive motions to resolve litigation in her client’s favor. She has tried numerous cases to verdict on behalf of her clients. In addition to being admitted to state and local federal courts, Ms. Canale is admitted to the Supreme Court of the United States.
Ms. Canale lectures regularly on topics related to risk management, employment issues, adequate security issues and defending litigation claims. Ms. Canale also implements and directs the firm’s Continuing Legal Education program.
In addition to her work at Bradley & Gmelich, Ms. Canale sits on the Board of Directors of Paws for Life K9 Rescue, a rescue group that has partnered with the California Department of Corrections to pull dogs from local shelters and provide them training, making them more adoptable.