Contracts, Covid-19, and You

By Karl Maier

Business disruption is in the air, literally. What does that mean for contracts, especially leases? Like many things, the answer is “it depends”…

Force Majeure

Many contracts, including commercial leases, have a clause for force majeure.  Whether it is called that or not, its effect is to excuse failure to perform caused by an event that is reasonably beyond the party’s control.

For this kind of clause to apply, the event must actually prevent performance, not just make it more expensive or onerous.  Our courts are reluctant to excuse non-performance of contracts.

If it applies, depending on its wording, the clause may allow a person to:

  • extend the time to perform,
  • prioritize one delivery over another,
  • suspend your obligation until the event ends, or
  • cancel the contract without liability.

Therefore, the specific wording matters.  Each clause must be looked at carefully.

Frustration of Contract

The legal concept of “frustration of contract” applies to all contracts.  A person might also be able to rely on this concept, in the face of a sudden crisis, to avoid a contract such as a lease.

Frustration is also based on an unexpected event that that is not the fault of either party to a contract.  Again, our courts look critically at each situation, and set a high bar to finding that a contract was frustrated. The event must either make the contract impossible to perform (for example, the building to be used was destroyed), or radically change the parties’ purpose in making the contract (for example, the event that the contract was all about was cancelled).

Warning: frustration of a contract does not just result in performance being delayed or suspended.  It cancels the contract entirely. If a tenant is only looking for temporary rent relief, and not to terminate the lease, this is not a good option.

Practical Alternatives

Even where the options above are not relevant or desired, other contract clauses will apply and should be reviewed: e.g., liability and damages, dispute resolution, and termination.

It may well be more practical to negotiate temporary adjustments that acknowledge the reality but preserve the business relationship.  In that case, document all changes carefully.

Sound, timely legal advice is so important at times like this. Review documents carefully and do the cost-benefit risk analysis before acting.

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