REFUNDS, DELAYS, AND OBLIGATIONS Business Contracts In The Age Of COVID B o s t o n G lo b e v i a G e t t y I m a ge s
Ken DeMoura and Paul Robertson (in pre-quarantine days!) DeMoura|Smith is an AV-rated Boston law firm with additional offices in Wakefield and Revere. The attorneys have more than 175 years of combined trial experience and have serviced clients in multiple U.S. and overseas jurisdictions.
St. Patrick’s Day Parade CANCELLED! • Party rents the Green Shamrock Pub on parade route • But . . . the parade is cancelled ! or . . . the pub burns down ! or . . . it snows two feet!
Some Definitions • The contract can become impossible to perform when the underlying object is destroyed (the pub burns down). • Performance can become impracticable when the path to performance is economically impeded (it snows two feet). • The contract’s purpose can be frustrated if the agreement was related to an event that is no longer to occur or a subject matter that is no longer relevant (the parade is cancelled). • Force majeure is purely a creature of contract , and can involve any one of these common law principles, or none of them.
Post-Pandemic Contract Performance • Understand both sides of the equation – compelling and excusing performance • Four defenses – one contractual and three implied at law Contractual Force Majeure Implied at Law (or by the UCC) Impossibility Impracticability Frustration of Purpose
General Themes • Read the Contract! • Outcomes are very fact dependent and vary upon 1. contract language; 2. nature of the intervening disruption; 3. parties’ responsive actions; and 4. the jurisdiction
General Themes • Plan on 1. consulting legal counsel; 2. understanding your rights, obligations, and leverage points; and 3. encouraging early and frequent communications among the contracting parties. • Read the Contract again! • Take the lessons forward (See Victoria’s Secret P&S).
“Force Majeure” “A contractual provision allocating the risk of loss if performance becomes impossible or impracticable, [or the purpose is frustrated, or performance is delayed or . . . .] esp[ecially] as a result of an event or effect that the parties could not have anticipated or controlled.” Black's Law Dictionary (emphasis supplied)
Force Majeure • Contractual defense pertaining to allocation of risk assumed by contracting parties. • Scope, effect, and applicability depend on contract’s express terms
Force Majeure • Don’t rest on contractual rights – act! • Address the duty to Mitigate • Observe any notice requirements • Evaluate causal connections
Impossibility Circumstances generally involve: • extreme or unreasonable difficulty or expense • virtual if not scientific impossibility of performance of contractual obligations • drastic increase in difficulty and expense of performance
Commercial Impracticability • Extreme or unreasonable difficulty • Unforeseeable by the parties at time of contract • Failure of third-party supplier is generally not an unforeseen contingency and does not relieve the promisor of breach • Changes in market generally not considered unforeseen.
Frustration of Purpose • party's principal purpose • substantially frustrated • without fault • by an event the nonoccurrence of which as a basic assumption when contracting • contract language or circumstances do not indicate contrary result
Commercial Leases • Read the Lease ! • Consult an attorney • Consult a commercial lease agent/broker • Exhaust “CARE Act” and other relief options • Relief for tenants not likely to be found in lease • Force Majeure provisions favor landlord • Be aware of defaults – don’t trip! • Heed notice obligations • Anything outside the box? • “damage?”/”hazardous substance?”
Eviction/Foreclosure Moratorium • Landlord may not commence eviction action • Thru at least Aug 18, 2020 • Applies only to “ non-essential ” evictions • Applies to “small business premises units” • operates only in MA • is privately owned • has 150 or fewer employees • Heed notice obligations! • Provides no relief from rent obligation itself • Some landlords also given mortgage relief
Negotiation Options • Act now – be proactive • Be prepared • know lease rights and obligations • Understand the market • Support your position with records • Provide a concrete proposal • Abate/Reduce/Defer? • Use of security/last month? • Have fallback positions ready
Negotiation Options • Call on the phone – don’t email • But then document, document, document • Be transparent • Evaluate Landlord’s position • Need for lender approval? • Mortgage moratorium available? • Put any agreement in writing! • “Hardball” option – Good cop, bad cop
Business Interruption Insurance • Most policies cover only physical disruption • Many specifically exclude “pandemic” • As of 1 May 2020, MA and other juridictions considering law to make insurers pay anyway • But constitutional law may get in the way • Not to mention a lack of funds
Practice Tips • Read the contract ! • Be proactive, not reactive! • record and preserve your steps • provide notice • communicate • amend? terminate? • Prepare for next time (climate, terror, pandemic, etc.)
Kenneth J. DeMoura Paul M. Robertson DeMoura|Smith LLP One International Place, 14th Floor Boston, MA 02110 617.535.7531 617.535.7532 (fax) kdemoura@demourasmith.com probertson@demourasmith.com
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