COVID-19 A POSSIBLE “FORCE MAJEURE” EVENT CONSTRUCTION CONTRACTS --- COMMERCIAL LEASES

This article is intended to provide the reader a basic understanding of the possible impact that COVID-19 and the California statewide "Shelter-In-Place" order signed by Gavin Newsom on March 19, 2020, may have on existing and future construction contracts and commercial leases.

The "Shelter-In-Place" restrictions are having immediate consequences on business operations, forcing the immediate closure of many businesses.

The "construction industry" has been exempted from the State's "Shelter-In-Place" requirements as an "essential services" / "essential needs" business. However, many contractors are still being prohibited from performing certain construction services. For example, contractors performing tenant improvements in hospitals and medical facilities are being prohibited from performing construction services while hospitals are inundated with COVID-19 patients.

This article is not intended to give the reader legal advice on the impact that the "Shelter-In-Place" restrictions will have on existing and future contracts. Rather, this article is intended to provide an overview of how COVID-19 may affect a party's ability to perform his / her contract; and, may provide explanation as to how nonperformance may be excused by the "force majeure" provisions contained in the commercial lease or the construction contract. Each "force majeure" provision is custom crafted and will be strictly interpreted.

Depending upon the language of a specific "force majeure" provision, the COVID-19 pandemic may allow the parties to a contract to invoke the "force majeure" clause. Or, if a contract does not contain a "force majeure" provision, common law remedies may still serve to excuse nonperformance.

FORCE MAJEURE CLAUSE IN AN EXISTING CONTRACT

The "force majeure" clause becomes extremely important when unforeseeable circumstances occur and renders contractual performance too difficult or even impossible. A pandemic, such as COVID-19, may likely be considered an unforeseeable event that may trigger a force majeure clause, which may allow a party to suspend, defer, or be released from its duties to perform without liability.

Force majeure means a "superior force" as our California Supreme Court has stated - is not necessarily limited to the equivalent of an act of God. Force majeure clauses in commercial contracts typically provide a list of specific events outside of the contracting parties' control that, upon occurrence, would excuse or delay the invoking party's performance, or permit the cancellation of the contract. An example would be events like war, terrorist attacks, famine, earthquakes, floods, strikes, fire, epidemics, and governmental action many or all of which may be included in a force majeure provision excusing a party's performance.

An example of a force majeure clause in a commercial lease may look like the following:

  • "If a landlord is delayed, interrupted or prevented from performing any of its obligations under this lease, including its obligations under the construction rider (if any), and such delay, interruption or prevention is due to fire, act of God, governmental act or failure to act, labor dispute unavailability of materials or any cause outside the reasonable control of landlord, then the time for performance of the affected, obligations of landlord shall be extended for a period equivalent to the period of such delay, interruption or prevention."

An example of a force majeure clause in a construction contract may look like the following:

  • "Excusable delays: The Contractor shall be liable for default unless nonperformance is caused by an occurrence beyond the reasonable control of the Contractor and without its fault or negligence such as, acts of God or the public enemy, acts of the Government in either its sovereign or contractual capacity, fires, floods, epidemics, quarantine restrictions, strikes, unusually severe weather, and delays of common carriers."

Other force majeure clauses may also include catch-all language broadly excusing performance based on significant events outside the parties' control. Force majeure clauses are found in all forms of contracts, including supply contracts, loan agreements, leases and construction contracts.

It is important to note that each "force majeure" clause has specific language that applies to that particular contract. The scope of a "force majeure" clauses depends on its express terms, there is no uniform rule as to when a force majeure clause excuses performance. Thus, it is important to review each contract individually in determining if the parties are excused or delayed from performing based on the unforeseeable circumstances identified in the specific "force majeure" provision.

When reviewing a "force majeure" clause in a contract, first, we must look at the language carefully to determine if the event giving rise to nonperformance or delay is specifically listed as a qualifying force majeure event. Second, even if the force majeure clause is invoked, we must determine if the circumstances were foreseeable and can be mitigated. If the performance is merely impracticable or economically difficult rather than truly impossible, then invoking the "force majeure" clause may not be a defense and liability may still exist for the defaulting or delaying party.

Using the coronavirus outbreak as an example, the restrictions placed by the "Shelter-In-Place" order and the prevalence of COVID-19 may impact a contractor's ability to mobilize and perform construction services and delay the completion of construction projects. If construction is halted because access is denied or due to COVID-19, resulting in project delays, the contractor may utilize a properly worded "force majeure" provision as a defense to nonperformance. Of course, the invocation of "force majeure" can only be accomplished on a contract by contract analysis.

If a "force majeure" clause does not specifically list "pandemics" and the parties to a contract disagree as to whether COVID-19 or the State's "Shelter-In-Place" order constitutes a force majeure event, it will ultimately be up to a court to decide the parties' rights and obligations. A "force majeure" clause that is silent on pandemics, epidemics, or that do not list governmental restrictions may likely to be insufficient to trigger a force majeure defense and it will be left to the courts to decide if the defenses of "impracticability" or "impossibility" apply. California law additionally requires that the party invoking force majeure demonstrate that they made "sufficient" or "reasonable" efforts to avoid the consequences of the force majeure events.

CONTRACTS LACKING A FORCE MAJEURE CLAUSE

If the contract at issue does not contain a "force majeure" provision, the party seeking to excuse nonperformance may still avail themselves of the common law doctrines of "impossibility" or, in some jurisdictions, "impracticability". These doctrines may excuse nonperformance where a party establishes that: (1) an unexpected intervening event occurred; (2) the parties' agreement assumed such an event would not occur; and (3) the unexpected event made contractual performance impossible or impracticable.

A party's nonperformance will not be excused under these principles where the event preventing performance was expected or was a foreseeable risk at the time of the contract's execution. As a result, mere market shifts or financial inability to perform generally do not constitute unforeseen events the nonoccurrence of which was a "basic assumption" of the contract. California law excuses performance where it is impracticable, such that it would require excessive or unreasonable expense to perform.

CONCLUSION

California's "Shelter-In-Place" order significantly impacts and results in many commercial tenant's closing their businesses. And, the business owners and landlords may be able to invoke "force majeure" provisions to excuse any contractual performance.

Landlords, tenants and all contractors should continuously monitor COVID-19 developments and the potential impact on contractual performance, document all reasonable steps to mitigate the effect on business operations.

If companies expect that COVID-19 may result in their own or their counterpart's inability to satisfy contractual obligations, an assessment of any applicable "force majeure" provision or common law principles of nonperformance must occur.

As noted previously, the foregoing article is intended to provide a general overview of the "force majeure" provisions that may be triggered by COVID-19 and California's "Shelter-In-Place" order. If the reader of this article has specific issues requiring specific analysis of his / her construction contract or commercial lease, the reader should seek out the advice of counsel.

Mr. Faoro is a partner at Last & Faoro specializing in Real Estate and Construction Law for over 30 years, assisting owners, property managers, developers, contractors and realtors in real estate and construction matters. He can be reached at (650) 696-8356, or by email at [email protected]. The foregoing article is intended only to provide a general overview of the force majeure defense in commercial contracts. This article is not intended to contain legal advice, is not intended to discuss or address any specific situation or problem and should not be relied on in making any legal decisions. If the reader has a specific legal question or needs legal advice, the reader should contact a qualified attorney.

Last & Faoro

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