FLORIDA BUSINESS LITIGATION: WHEN CONTRACTUAL PERFORMANCE MAY BE EXCUSED BECAUSE OF PANDEMIC

As the world strives to persevere through the COVID-19 pandemic and the resulting economic fallout, it may become impossible for many Florida businesses to comply with their business contracts. Businesses may be able to cancel those contracts if they contain a “force majeure” clause. Force majeure clauses are contractual terms which remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and restrict parties from fulfilling contractual obligations. Typical force majeure clauses address global catastrophic events, such as acts of war, environmental catastrophe, riots or civil unrest, or complete unavailability of supply. Absent a force majeure clause, parties alternatively may be able to avoid liability by asserting the defense of “impossibility” to excuse their failure to perform on the basis that performance of the contract impossible. Peter Mavrick is a Miami business litigation attorney with extensive experience in defending and prosecuting the interests of businesses in court proceedings and arbitration.

Generally, when a party to a contract fails to perform under the contract, they become liable for damages. Force majeure clauses are intended to excuse performance under a contract if calamity causes performance to become impossible or impractical, and that calamity could not have practically been predicted or prevented. Essentially, a force majeure clause is an agreement that allocates the risk of calamity away from the victim. For example, if a hurricane demolishes a factory overnight, such a calamity might excuse the performance under the contract for that company. The company may have to return the money paid by the purchasers but will not be on the hook for the damages for all of purchases that it failed to fulfill. Force majeure clauses may also only temporarily suspend performance, requiring the party to perform under the contract as soon as the calamity has passed.

Force majeure clauses “will generally only excuse a party’s nonperformance if the event that caused the party’s nonperformance is specifically identified.” ARHC NVWELFL01, LLC v. Chatsworth at Wellington Green, LLC, 18-80712, 2019 WL 4694146 (S.D. Fla. Feb. 5, 2019). An example of an exception to this general rule occurred in Devco Dev. Corp. v. Hooker Homes, Inc., 518 So. 2d 922 (Fla. 2d DCA 1987) where the court found that excessive rain qualified as “any other condition” within the force majeure clause, which excused the delayed construction of a home.

In ARHC NVWELFL01, LLC v. Chatsworth at Wellington Green, LLC, a federal Judge in the United States District Court for the Southern District of Florida addressed the issue of whether a force majeure clause excused the performance of payment of rent. The tenant built its business model in part around a government program. Soon after the lease was entered, the government made changes to the program causing the tenant to receive less than the revenue it expected. The lease had a force majeure clause, which excused the payment of rent during “force majeure” events, which included “governmental action.” The court found that the tenant failed to show that its inability to pay was a direct result of the government action, as opposed to a factor which simply affected the tenant’s revenue, and declined to permit the clause to excuse the tenant’s failure to pay rent.

The COVID-19 pandemic may qualify as an excuse under a force majeure clause of contracts, but that protection will depend on the wording of the clause and what degree the COVID-19 pandemic has affected the capability to perform. The subject force majeure clause is more likely to apply to COVID-19 situations if it includes phrases like epidemic, quarantine, pandemic, disease, or public health emergency. Some force majeure clauses do not go into such detail and may simply say “act of God.” Traditionally, calamities that qualified as acts of God were “unpreventable event caused exclusively by forces of nature, such as an earthquake, flood, or tornado.” ACT OF GOD, Black’s Law Dictionary (11th ed. 2019). However, the phrase can be interpreted to mean any significant calamity neither engineered by nor predictable by man. Whether the COVID-19 pandemic will qualify under any particular force majeure clause is dependent on the particular wording of the clause as well as the parties’ intentions when entering into the contract. The degree of disruption to contractual performance caused by COVID-19 will also influence whether it will apply under a force majeure clause.

If the contract does not contain a force majeure clause, a party may still be excused from performing under certain circumstances if performance is impossible. “Under the doctrine of impossibility of performance or frustration of purpose, a party is discharged from performing a contractual obligation which is impossible to perform and the party neither assumed the risk of impossibility nor could have acted to prevent the event rendering the performance impossible.” Marathon Sunsets, Inc. v. Coldiron, 189 So. 3d 235 (Fla. 3d DCA 2016).

Government orders or seizures, such as quarantine or civil takeover, may justify the use of an impossibility defense. Florida’s Third District Court of Appeal in Miami, Florida, in the case Hilton Oil Transp. v. Oil Transp. Co., S.A., 659 So. 2d 1141 (Fla. 3d DCA 1995), held that “[i]t is obvious that war time seizures are unforeseeable and the parties to the charter hires have absolutely no control over such seizures and are thus at the total mercy of the government”. More recently, in Marathon Sunsets, Inc. v. Coldiron, 189 So. 3d 235 (Fla. 3d DCA 2016), the parties contracted to build a gate; however, the government denied the permit for the gate. The plaintiff sued the gate-builder under a breach of contract, but the appellate court found that the government’s denial excused the gate-builder.

The COVID-19 pandemic may qualify as an act of God, justifying an impossibility defense. The government response is unprecedented in modern times. Government closures will make performance of many contracts impossible. Whether it qualifies as an excuse will depend on the particular circumstance. Certain facts may affect whether the excuse is available. Arguably, parties that entered into a contract after the existence of COVID-19 became known may not benefit from an impossibility defense became they would have had sufficient prior knowledge of the calamity to prevent them from using the excuse.

Questions may arise as to whether impossibility would apply if a contract could have been performed, but performance would be dangerous or reckless in light of an act of God like the COVID-19 pandemic. For example, consider a hypothetical circumstance where parties contracted to have a venue for a wedding. If the venue-owner refused to permit the wedding to occur after a government quarantine shut down the operation of the business, that may justify the defense of impossibility. The analysis becomes more complicated if the venue was lawfully permitted to operate, but its operation would potentially expose participants to the COVID-19 virus.

Peter Mavrick is a Miami business litigation lawyer who has successfully prosecuted and defended breach of contract and other business lawsuits. This article does not serve as a substitute for legal advice tailored to a particular situation.