COVID-19, force majeure provisions, and impossibility of performance
How does the Coronavirus impact your contractual rights?
People are exercising social distancing and being quarantined; restaurant, retail, and event venues are temporarily shutting down; and group celebrations are being postponed and canceled. With everything going on, it is understandable if your first thought is not “how does COVID-19 impact my contractual rights?” However, for the restaurants, retail spaces, event venues, landlords, and individuals being impacted by COVID-19, the question of excused performance under their contracts is one of their first thoughts.
Many contracts have what are known as “Force Majeure” provisions. These provisions excuse performance of one or both parties in the event of unforeseeable circumstances that prevent performance under the contract. Force majeure provisions are present in event contracts, commercial leases, entertainment contracts, sale agreements, and more. Though there is no standard form used, force majeure provisions generally excuse performance if a party is either delayed or prevented from performing due to natural disaster, war, terrorism, strike, labor trouble, or Acts of God. Some contracts also excuse performance for disease or epidemic in the applicable jurisdiction, events impacting government services or functions, or governmental authority. What is an Act of God? How do you interpret a force majeure provision in your contract?
Impacted parties should first look to the specific language of their contract. In leases, for example, force majeure provisions are used in a variety of ways. Some leases do not excuse payment of rent in the event the force majeure clause is triggered but excuse a landlord’s performance of its obligations in the lease. Others excuse a tenant’s payment of rent for the duration of the triggering event. Still others do not excuse a tenant’s payment of rent but do excuse other defaults in the lease—such as a default for not occupying the space in accordance with the lease—during the triggering event. How COVID-19 shutdowns impact each of these force majeure provisions will depend on the specific language of those leases. The same is true for rental agreements, entertainment agreements, and sale agreements.
Underlying these specific contractual force majeure provisions is state law. Contracts are interpreted in accordance with state law—and generally have a provision providing which state’s law governs the contract.
In South Carolina, parties are excused from performing under a contract if performance is impossible. See Morin v. Innegrity, LLC, 424 S.C. 559, 567, 819 S.E.2d 131, 136 (Ct. App. 2018), reh’g denied (Oct. 18, 2018); see also Pearce-Young-Angel Co. v. Charles R. Allen, Inc., 213 S.C. 578, 586, 50 S.E.2d 698, 701 (1948); Moon v. Jordan, 301 S.C. 161, 164, 390 S.E.2d 488, 490 (Ct. App. 1990). South Carolina case law provides that “performance is rendered impossible by an act of God, the law, or other party.” Jones v. Bates, 241 S.C. 189, 127 S.E.2d 618 (1962). This standard is more stringent than some other states where parties are excused from performing under a contract if performance is impracticable, rather than impossible. See 17A Am. Jur. 2d Contracts § 643 (Feb. 2020 Update).
Impossibility of performance acts as a “gap filler” for when there is no force majeure provision or the force majeure provision does not cover a specific event that makes performance impossible. Morin, 424 S.C. at 567, 819 S.E.2d at 136. Performance under a contract is impossible when “the thing to be done cannot by any means be accomplished.” Morin, 424 S.C. at 567, 819 S.E.2d at 136 (Ct. App. 2018) (quoting Hawkins v. Greenwood Dev. Corp., 328 S.C. 585, 593, 493 S.E.2d 875, 879 (Ct. App. 1997) (citation omitted)). If performance “is only improbable or out of the power of the obligor, it is not . . . impossible.” Id.
In South Carolina, performance under a contract was found to be impossible when it was prevented by the British invasion during the American Revolution. Ordinary of Charlestown Dist. v. Corbett & Lightwood, 1 S.C.L. 328, 323 (1793). However, performance was found not to be impossible when a buyer could not obtain money to close on real estate. See Moon v. Jordan, 301 S.C. 161, 164, 390 S.E.2d 488, 490 (Ct. App. 1990); Morin, 424 S.C. at 570, 819 S.E.2d at 137. There, the court found the failure to perform was based on “subjective impossibility,” and it did not matter whether such failure was due to poverty, financial panic, or a third party. Moon, 301 S.C. at 164, 390 S.E.2d at 490; see also B’s Co. v. B.P. Barber & Assoc., Inc., 391 F.2d 130 (4th Cir.1968).
How does COVID-19 fit into and implicate the impossibility of performance defense? The answer is going to be situational. However, Robinson Gray is here, we are thinking about these issues, and we are ready to advise and help.
This post has been prepared by Robinson Gray Stepp & Laffitte, LLC for informational purposes only and does not constitute legal advice. For more information, contact attorney Molly Campolong.