In addition to the obvious health concerns and risks of COVID-19, the pandemic has severely impacted individuals and businesses from an economic standpoint—particularly the restaurant industry. As states ordered restaurants and bars to close up shop to prevent further outbreak, on-premise operators were left with limited or no income.
These restrictions have left many entities wondering how they are going to pay mortgages, lines of credit, business loans, rent and other obligations for an extended period. But restaurants and individuals may have more protections than they think.
Force Majeure and Other Legal Clauses
The law “excuses” non-performance, such as non-payment, in circumstances wherein the underlying event was not anticipated, not foreseen and not caused by an individual or business. These doctrines are known as force majeure, impossibility, impracticability, and frustration of purpose.
For most of us, these doctrines have not been discussed or applied since World War II or Prohibition. These state-ordered shutdowns were not anticipated, and none of us caused it. Everyone has been affected by it, and everyone needs relief from it. Individuals and businesses may be “excused” from making payments to creditors under certain contracts and agreements to which they are bound.
Force majeure is a common clause usually at the end of a contract that identifies certain events that excuse non-performance of a party. A force majeure clause will provide relief to a party for breaching/defaulting on their contract due to circumstances or events beyond one’s control. These provisions may include circumstances/events such as: acts of God, acts of government, natural disasters, fire, epidemics, pandemics, quarantine restrictions, acts of war and/or terrorism, among others.
Some clauses only have acts of God and natural disasters, and others may be broader to include a number of these other events. A force majeure clause containing a government act, shutdown, pandemic or quarantine would obviously excuse one’s performance during this COVID-19 crisis if such government act/shutdown/pandemic actually impacted your performance under a contract. One’s performance that may be excused under this provision would likely include the monthly payment due thereunder.
But if the force majeure clause only includes act of God, then is COVID-19 an act of God? Arguably, yes, as it fits the definition of unusual and overwhelming, doing severe damage by its own power, and not being an independent act of one of the parties to a contract. But Ohio courts in particular have also found that a party will not be excused from performance merely because performance may be difficult, burdensome, or economically disadvantageous.
If your contract does not contain a force majeure provision, non-performance may still be excused under these other different legal theories.
The doctrine of impossibility is closely related to that of commercial impracticability. Essentially, both defenses will excuse performance due to circumstances beyond a party’s control, which such unforeseen event renders performance under the contract impossible or commercially impracticable. A mere change in the degree of difficulty or expense (i.e. increased wages, prices, or costs) does not amount to impracticability. It must be close to impossible.
Keep in mind, the mere occurrence of the pandemic alone would likely not excuse one’s performance, as without a required shutdown, the business could still remain open and the employees would get a paycheck, making their performance to pay their monthly obligations neither impossible nor impracticable. Low sales from the pandemic would not suggest impossibility nor impracticability. The unexpected occurrence of the government shutdown is the crux of this argument.
Further, a party is expected to use reasonable efforts to overcome obstacles to performance, and a performance is impracticable only if it is so in spite of such efforts.
For example, a restaurant or a terminated employee may be excused from paying their rent or their mortgage or other loans during this pandemic. If the government shuts down a business’s operations, the effect will be no revenue for the business and no paychecks for the employees, which will make the business’s ability to pay rent or its mortgage impossible or impracticable.
First, something unexpected has occurred—the required shut down of the business operations due to the COVID-19 pandemic was truly unexpected. Second, the shutdown has to be beyond one’s control, which it obviously was; no one expected or anticipated state-ordered shutdowns of all these businesses and thus putting everyone out of work.
Finally, the government shutdown has rendered one’s performance of paying obligations impossible or commercially impracticable. Without breaking the law, the business cannot operate, and by not operating, it will not receive revenue and cannot pay its employees. Without revenue and without pay, it becomes impracticable, if not impossible, to pay one’s bills.
Frustration of Purpose
Frustration of purpose is where, after a contract is made, a party’s principal purpose is substantially frustrated without his/her fault by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made, his/her remaining duties to render performance are discharged, unless language or circumstances indicate the contrary.
The elements are identical to Impossibility and Impracticability, except the first element is different–instead of performance being impossible/impracticable, the supervening event requires a party’s principal purpose to be substantially frustrated. The frustrated purpose must have been the principal purpose of that party in making the contract. Essentially, the purpose that has been frustrated must be the basis of the contract, and without it, the transaction would make little sense.
For instance, say a restaurant leases space from a landlord in exchange for monthly rental payments. The main purpose of the lease is for the restaurant to be open to the public to serve food and drinks in order to pay the rental that is due. But because of this current pandemic, the restaurant was ordered to shut down. The main purpose of the lease has absolutely become frustrated due to the required shutdown, as the restaurant is no longer receiving revenues to pay its rent.
Who is protected under these clauses? As in most cases, it depends.
If a contract contains a force majeure clause, then there is more protection because it is a written clause in a contract excusing non-performance and both parties agreed to it. Without that clause, you still have other multiple defenses available to excuse your non-performance.
On the other hand, since states have allowed carry-out operations to continue for restaurants, these defenses may hold less weight—although difficult and burdensome, it’s arguably not impossible/impracticable to obtain sales.
Like many legal matters, the likelihood in succeeding under these legal defenses will be determined on a case-by-case basis. But with governmental mandated closures and catastrophic ramifications therefrom, the defenses of impossibility, impracticability and frustration of purpose are going to be a strong financial shield and serve as protection, in a way that none of us have ever seen in our lifetimes.
Jordan Benson is an attorney at the Columbus, OH, office of Isaac Wiles Burkholder & Teetor.