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April 27, 2020

Contracts in the age of COVID: Is your company on or off the hook?

Screenshot from Thursday’s GNHCC webinar, with moderator Sheehan (top left) and panelists (clockwise from top right) Perito, Naples and Zana.
By Michael C. Bingham

Are your company’s longstanding contracted legal obligations — to pay your office lease, fulfill a supplier contract, rent space for a corporate function — automatically voided by the coronavirus crisis that has turned the world (and not just the business world) upside down?

The answer is no — not automatically. A concept of U.S. jurisprudence known as force majeure (literally act of God) may void some commercial obligations or excuse non-performance of others under a contract when such an unforeseen divine act made agreed-upon performance or fulfillment of obligations impossible. A tornado, say. Or a 9/11-scale terrorist attack.

Or a global pandemic.

“Business & Property Contracts in the Coronavirus Crisis” was the subject of a Thursday webinar presented by the Greater New Haven Chamber of Commerce. The session was moderated by chamber President Garrett Sheehan.

“Even in this [emergency] situation, we are still regulated by contracts” governing most important commercial relationships, said Sheehan, who himself holds a JD degree.

With regard to commercial real estate leases, “We’re seeing workouts between [commercial] landlords and tenants” over lease terms no longer practical for one or both parties, said attorney Lisa M. Zana of Shipman & Goodwin. “These might include deferral of rent payments as part of an agreed-upon repayment plan” for when economic conditions allow. “It takes creative solutions to those types of things,” she added. “We’re seeing people working together on both sides.”

Pascal F. Naples is an associate in the Hartford office of Shipman & Goodwin, who co-authored a white paper on force majeure clauses in contracts and their applicability under the present pandemic crisis.

“Almost from the outset [of the crisis] we started to see many businesses questioning, what does this mean for our contracts — leases and all kinds of commercial contracts,” Naples said. “Does [force majeure] mean we don’t have a contract any more? A lot of this is starting to bubble over into real legal conflicts.”

The answer — as is true of so many legal questions — is: It depends. “Some massive interruption — like COVID-19 — that interferes with parties’ ability to perform under a contract in a way that no one could have seen in advance, then it may allow for the cancellation of the contract,” Naples explained.

But, he added, “All these clauses are different in little ways” that may impact their applicability to particular commercial agreements. Some require notice to invoke within a specified period of time from the onset of the emergency event, for example. In other cases non-performance under a contract may have predated the coronavirus crisis, but one party seeks to use the emergency as a pretext to void the agreement.

A common issue since the COVID onset, said James Perito, partner with the law firm of Halloran & Sage, is commercial tenants who cannot pay rent because of adverse business conditions and evaporating revenue streams. In the case of smaller companies that have applied for and received federal emergency disaster relief under the Paycheck Protection Program (PPP) or the SBA’s Economic Injury Disaster-Relief Loan program, “A lot of landlords are saying [to tenants], ‘You have to pay me the rent,’” Perito explained, even though 75% of PPP grant proceeds must be used to maintain company payrolls in order to be forgivable.

“You need to have conversations and negotiations between the landlord and tenant, because everybody’s getting hurt in this situation,” Perito said. “It’s important to try to keep the relationship going as we get through this.”

“At every level of the business relationship you have parties impacted,” said Naples. “The tenant is impacted because they don’t have the customer stream they used to. The landlord is impacted because they’re not getting the payment from the tenant that they used to. And the lender is impacted because they’re not getting the payments from the  landlord.”

Another example is contracts for business events and conferences that cannot take place.  Cancellations are happening because of executive orders forbidding gatherings of more than 10 people and  because of business travel restrictions. In those situations, “Force majeure clauses have become extremely important,” said Zana, “because you’re talking about millions of dollars of cancelled contracts.”

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