Client Advisory: Coronavirus and Contract Enforcement in Virginia
Date: March 25, 2020
Among the many concerns for companies dealing with the fallout from COVID-19 is whether they continue to be obligated under their real estate leases and other contracts, temporarily or permanently. In its simplest terms, the question presented is which party bears the risk of nonperformance caused by, or resulting from, the pandemic.
This advisory considers the key defenses to non-performance under a contract that may be available under Virginia law in light of the COVID-19 pandemic, along with some related issues.
Starting Point: “Force Majeure” Clauses
Many leases and other agreements include a “force majeure” clause, which establishes the rights and responsibilities of the parties to the agreement in a situation in which one or both parties is unable to perform their contractual obligations due to circumstances beyond their control. These provisions are intended to provide relief to one or both parties when performance under the agreement is truly out of the party’s control. To that end, a typical force majeure clause will reference Acts of God (typically, extreme natural disasters), wars, insurrections, labor disputes, terrorist acts, or transportation shut downs.
To provide a valid defense to non-performance, an event must not only be out of the control of the affected party, but it must also prevent the affected party from performing their obligations under the agreement. If applicable, a defense based on a force majeure clause may provide an affected party with a range of options: (i) cancel the agreement entirely; (ii) suspend performance under the agreement until the applicable event has terminated; or (iii) excuse non-performance under the agreement.
In general, Virginia courts will interpret and enforce express force majeure provisions strictly in accordance with their stated terms; however, if an agreement does not include an express force majeure provision, Virginia courts will not entertain a force majeure defense.
Whether a particular event qualifies as a force majeure event will depend largely on the specific language of the clause in question. If the clause contains an exclusive list of qualifying events, the current event must fall within the scope of a listed item. Using this approach in the context of the COVID-19 pandemic, if the agreement being reviewed specifies “pandemics,” “disease,” or “national emergency” as a force majeure event, the affected party may have a reasonably strong argument that the COVID-19 pandemic qualifies under these events. If a clause does not include an exclusive list, the current event may qualify as a force majeure event if it is similar in nature to one or more of the events included in the list.
Whether or not the event in question is deemed to be within the definition of force majeure, as defined in the agreement, is not necessarily dispositive as to the effectiveness of the defense to a party’s non-performance. Many agreements carve-out certain obligations of a particular party from the applicability of the force majeure defense. For example, while force majeure clauses of many commercial leases may excuse the tenant’s non-performance of a wide variety of non-monetary obligations, such as the requirement for the tenant to continuously operate its business in the leased premises during specified hours for the duration of the term of the lease, these clauses often specify that the force majeure language does not alter the tenant’s obligation to pay rent or other charges that come due under the lease.
There is limited case law in Virginia on the applicability and enforceability of force majeure clauses. In other states, courts generally construe force majeure clauses very narrowly, excusing non-performance only if the event in question is specifically identified in the agreement; and only if the event makes it impossible for the affected party to perform its contractual obligations. As a general rule, it is not sufficient for a party to establish that the force majeure event simply made performance more difficult or more burdensome from a financial perspective. Rather, the party must establish that its performance has been prevented by the event. For example, the force majeure event may impact a tenant’s revenue stream, which will in turn make it financially more difficult for the tenant to make its rent payments. That is not the same as the tenant being prevented from making its rent payments. Courts will also consider the extent to which the event in question, and the related non-performance, was foreseeable and able to be mitigated by the affected party.
In addition, an agreement that includes a force majeure clause may also include a procedure that must be followed by a party that intends to argue a force majeure defense. For example, a party may be required to give notice to the other party before invoking the force majeure clause. The clause may also impose certain duties once a party asserts a defense based on the clause, such as the duty to mitigate any damages sustained as a result of non-performance. In order to seek relief, or assert a defense under a force majeure clause, a party will need to establish that it complied with all of the terms of the clause in question.
Doctrine of Impossibility
Even if an agreement does not contain an express force majeure provision, Virginia courts have long recognized the defense of impossibility of performance. It is well settled that where impossibility is due to the fortuitous destruction or change in the character of something to which the contract related, or which by the terms of the contract was made a necessary means of performance, the promisor will be excused, unless the party expressly agreed in the contract to assume the risk of performance, whether possible or not, or the impossibility was due to such party’s fault. Under this approach, a court infers a contractual term, which states that each party to the agreement will be able to perform its respective obligations. That is, the court acknowledges that the parties entered into an agreement based on the assumption that certain necessary facts or factors will continue to hold true (or continue not to hold true). If, prior to the time for performance, and through no action by the affected party, those facts or factors have changed, the court may find that the agreement be terminated and the parties excused from their performance obligations thereunder, or alternatively, if the provision at issue is not the basic purpose of the contract, that only the clause containing the obligation that is impossible to perform may be voided. A supervening condition that renders a promisor's performance temporarily impossible will not release such promisor from the duty of performing but will only suspend that obligation. This general rule is inapplicable, however, if the delay will make the promisor's performance materially more burdensome. In that instance, the promisor's duty of performance is discharged rather than suspended (subject to contrary agreement).
Adding to all of the uncertainty in this context is the fact we do not yet have any significant indication or guidance with respect to how courts in Virginia and elsewhere will apply force majeure clauses and the other non-performance doctrines discussed above in the face of the COVID-19 pandemic. It remains to be seen whether such courts will take a less restrictive approach under these circumstances in an effort to afford relief to companies who have been negatively impacted by the fallout from the pandemic.
As companies begin the process of reviewing their leases and other agreements, our Corporate and Real Estate team is available to help with that review and provide guidance on the availability of any non-performance defenses under particular circumstances.
If you would like assistance in these areas, please contact: Katja Hill, John Selbach, Dwight Hopewell or Julian Pedini.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.