Contract Obligations During COVID-19

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FAQ About Contract Obligations During COVID-19

Q: I have heard that “Acts of God” or Force Majeure will excuse the performance of a party to a contract. Is that true?

A: Maybe. Generally speaking, an “Act of God” (also known as force majeure) contract provision can delay or excuse a party from the contract due to certain unforeseen problems beyond either party’s control. Illinois does not define what events do or do not qualify as force majeure, so whether it applies to COVID-19 depends on what the contracting parties agreed to include in the contract. Generally, these clauses are written to include events such as weather disasters, acts of terrorism, war, unforeseeable government acts, and labor disputes. 

Force majeure clauses have several pitfalls. First, as mentioned above, these clauses work both ways, so they may not necessarily protect a business as much as the business needs. These clauses also raise questions about whether the events listed were actually unforeseeable given that the parties foresaw them enough to include in the contract. Finally, before successfully relying on a force majeure clause, Illinois courts require parties to make an effort to resolve their inability to perform.

Q: Does business interruption insurance cover economic losses due to COVID-19?

A: We’ve gotten this question from many of our clients and the difficult truth is that many insurance policies exclude coverage for events like this. Of course, like with the other scenarios, it depends on the actual policy language as to whether COVID-19 is covered. Insurance contracts, in particular, must be worded carefully to exclude coverage because courts give the benefit of the doubt to the business, not to the insurance company.

Further, despite what insurance companies, agents, or adjusters are saying, coverage may exist under certain legal theories—such as that COVID-19 has caused a physical loss or damage. There has been a noticeable uptick in lawsuits on these theories and we’ll continue to monitor and update you as these cases develop. 

Q: How should businesses deal with other kinds of debt payments for loans, lines of credit, or other similar obligations?

A: Businesses should contact their financial institutions to learn about any programs to help businesses facing similar issues. Businesses should also consider using PPP loan funds to pay interest on those loans in the interim if the debt was incurred before February 15, 2020.

Q: Can a business avoid paying unaffordable executive compensation agreements or other employee contracts?

A: The same contract defenses that may apply to other contracts could apply to employment agreements—Act of God or Force Majeure, commercial frustration, or impossibility.  The applicability depends upon the contract.  Some of the government loan programs cover executive pay, but loan forgiveness does not include individual salaries over $100,000.

Q: Can businesses that can’t use their office space due to Stay-at-Home orders not pay part or all of their rent?

A: Maybe. Certain contract law doctrines like impossibility, commercial frustration, or––if written into the lease––force majeure (“Act of God”) clauses may work to reduce or eliminate rent obligations where some unforeseen event prevents businesses from living up to their end of the deal. In fact, we’ve been seeing an uptick in lawsuits in the past few weeks based on these types of arguments. Businesses should be wary, though, as these doctrines may be used both ways, depending on the circumstances. 

Another difficult issue is that not all leases are the same, so the first step for lease questions is to look at the text of the actual lease agreement.

It is generally true that simply not paying part or all the rent due would likely result in a breach of the lease, exposing the party to potentially serious (read: expensive) consequences. Business who are considering these options should seek legal advice before taking any kind of action.

Finally, businesses can use Paycheck Protection Program (“PPP”) funds––that may be eligible for loan forgiveness––to pay their rent.

Q: Is it possible to get a rent reduction for our company's office space during the course of the Executive Order? 

A: Rent reductions can be a type of relief, however, this would likely be a separate agreement arranged between the landlord and tenant. Parties should examine their leases to see if an “Act of God” or force majeure provision establishes the basis to arrange for such relief. 

Q: We have contracts with vendors that are paid automatically each month.  Our business is in retail but now we aren’t open for customers. Is there a way to delay payment or end these contracts?

A: Parties may resort to certain contractual defenses to delay payments. Contractual defenses relevant to the current climate are the doctrine of impossibility and frustration of purpose. The doctrine of impossibility applies when performance of a contract is no longer possible due to an unforeseen circumstance. Frustration of purpose is invoked when performance is still possible, but unforeseen circumstances have defeated the purpose of the contract causing there to be no basis for performance. Parties should consult with an attorney to see which contractual defenses may apply to delay payment under a  contract. Each case is different and depends on the language of the contract. 

Q: Our commercial lease will soon be expiring and we are considering renewal. Given the events surrounding COVID-19, are there any modifications our company should request to the lease before renewal?

A: Companies should assure that their contracts include a Force Majeure or “Act of God” provision which encompasses pandemics and other economic downturns. Additionally companies should assure their leases do not waive any contractual defenses, specifically the doctrine of impossibility and frustration of purpose and that provisions exist which can override any “time is of the essence” provision in the lease. If you have further questions regarding contract renewal, we recommend consulting an attorney

Q: Does the Paycheck Protection Program help businesses pay rent? What requirements would our company have to meet to qualify for the program?

A: Small to medium-sized businesses with fewer than 500 employees per location may be eligible to receive loans of up to $10 million. Businesses may have these loans forgiven if used for payroll, rent, and utility purposes, provided the business maintains its workforce. Parties should consult an attorney to see if they qualify for the Paycheck Protection Program and to learn further details about the law. 

FAQ on Coronavirus Relief for Small Businesses and Freelancers

On Thursday, The New York Times published an informative Q&A about the red tape surrounding the bipartisan $2 trillion economic relief plan signed into law by the President on March 27. Click here to read the article.

Continuing COVID-19 Coverage 

This is the latest in our developing analysis and updates on the coronavirus. Click below to get up-to-date on how the pandemic and the governments’ responses may impact your business.

04/07/2020 - Paycheck Protection Program and Loan Forgiveness Update

04/03/2020 - Teleworking: The Legal Issues Employers Don't Think About

04/02/2020 - What Employers Must Do Regarding the FFCRA

03/30/2020 - Who wouldn't take a potentially free business loan?

03/27/2020 - $2 Trillion Stimulus Package Offers Relief to Small Businesses

03/27/2020 - Coronavirus Legal Q&A

03/22/2020 - COVID-19 Executive Order and Financial Implications Explained

03/20/2020 - GKWW is Here to Help During COVID-19

03/19/2020 - GKWW is Here to Help During COVID-19

03/17/2020 - An Update From GKWW Regarding COVID-19

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