EFFECTS OF COVID-19 ON BREACH OF COMMERCIAL CONTRACT
Businesses around the world have been impacted by the spread of Covid-19. The consequences have led to the disruption of supply chains, reduced demand, work stoppages, and bankruptcies. To cite one statistic, the U.S. Commerce Department estimates that in the second quarter of 2020, the U.S. Gross Domestic Product (GDP) fell 32.9%. Consequently, countless businesses will be unable to meet their contractual obligations, forcing business owners, including commercial landlords and tenants, to consider whether to modify their agreements or pursue a legal remedy.
In recent months, the effects of Covid-19 has led to a significant increase in legal actions where parties seek to to enforce or interpret force majeure clauses in their agreements. This is because, in the Codid-19 context, such clauses may provide the only viable defense to a breach of contract claim.
It must be noted, however, that the various eviction moratoria do not protect commercial tenants from being evicted. Nor do any governmental orders suspended any obligation arising under either a residential or commercial lease agreement. That being said, the following may excuse the performance of a contractual obligation for those who have been impacted by the spread of Covid-19.
WHAT ARE FORCE MAJEURES?
A Force Majeure, which is French for a superior or irresistible power, is an event that is a result of the elements of nature, such as an earthquake or hurricane, as opposed to human activity. It, however, can include events resulting from human activity such as a war or change in law. To claim force majeure as a defense, courts often require that the events that caused the delay or failure of performance be beyond the party’s control, not the result of the claiming party’s fault or negligence.
Where the parties have included a force majeure clause in their agreement, as they often do, Florida courts will enforce the terms of the clause. Where the parties have not included a force majeure clause in their agreement, Florida courts may still excuse performance under the doctrines of Impossibility of Performance or Frustration of Purpose.
THE DOCTRINE OF IMPOSSIBILITY OF PERFORMANCE
The Doctrine of Impossibility of Performance refers to situations where, for one party, the purpose of the contract has become impossible to perform. To claim Impossibility as a defense, courts also require that what made the performance impossible have not been foreseeable at the time of contracting.
The impossibility doctrine “should be employed with great caution if the relevant business risk was foreseeable at the inception of the agreement and could have been the subject of an express provision of the agreement.” American Aviation, Inc. v Aero-Flight Serv., Inc., 712 So. 2d 809, 810 (Fla. 4th DCA 1998).
THE DOCTRINE OF FRUSTRATION OF PURPOSE
The Doctrine of Frustration of Purpose refers to situations where a party’s principle purpose is substantially frustrated by the existence or non-existence of a fact which was a basic assumption upon which the Contract was made. The frustration doctrine is similar to the impossibility doctrine, but also distinct. The doctrine of frustration does not apply to the impossible, bur rather is “limited to cases where performance is possible but an alleged frustration […] totally or nearly totally destroyed the purpose of the agreement.” Valencia Center, Inc. v. Publix Supermarkets, Inc., 464 So.2d 1267, 1269 (Fla. 3DCA 1985) (citations omitted).
As with the impossibility defense, the frustration defense requires that the fact or event at issue have not been foreseeable at the inception of the contract. That the contingency could not have been provided for in the contract.
Courts are reluctant to apply the frustration doctrine to cases where, for example, the fact or event made performance merely impractical, unprofitable, or would only serve to release one party from having made a bad bargain. The application of the doctrine, in short, has to go to the intended purpose of the contract, not merely be used as a means to escape one’s contractual obligations.
In conclusion, businesses whose contracts are being impacted by Covid-19 need to review their contracts to consider their rights and decide on the best way to respond. While the above defenses may seem straight-forward, they are fact-intensive defenses and their application to the variety of commercial circumstances is often complicated.
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