THE EFFECTS OF CORONAVIRUS ON YOUR CONTRACTUAL OBLIGATIONS AND IMPLICATIONS IT COULD HAVE ON CONSTRUCTION, GENERALLY

Mon 30th Mar, 2020 | Blog by Michael Michetti

By Mark S. Slack  and Jessica Tolin (Litigation Group)

You may have seen the terms “Impossibility of Performance”, “Acts of God”, “Force Majeure”, “Doctrine of Commercial Frustration”, “Frustration of Purpose”, and/or “Discharge by Supervening Impracticality” in one of your contracts before.  But, what do these phrases mean and how do these terms apply to you?  Are you or your company currently obligated under a contract or other agreement to provide or perform labor, materials, or other services?  Are you or your company expecting others, who are obligated under a contract or service agreement, to provide or perform labor, materials, or other services?  Are you a party to a rental agreement, a commercial lease, a sales agreement, construction agreement, a mortgage or service agreement?

If you are currently obligated to perform under a contract, such as those aforementioned, the current conditions created by the Coronavirus could impact both you and your contracting party’s ability to perform or comply with contractual obligations, and possibly even excuse or discharge both parties from further performance under the contract, or otherwise extend the time for performance. 

The first thing that you will want to do is look at the terms of the contract itself, and determine what circumstances were anticipated at the time the parties entered into the agreement.  For example, the contract may actually identify events or circumstances that affect a party’s obligations under that contract. The date of the contract may also affect whether you are able to seek an extension of your performance or discharge your obligation to perform altogether.
A force majeure clause, as it is generally defined, is “‘a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.’” Rodriguez v. BA Eola, LLC, 404 F. App’x 418, 419 (11th Cir. 2010) (quoting Black’s Law Dictionary, 718 (9th ed.2009)). 

            Impossibility of Performance resulting from frustration of the contract by some unforeseen event is also a recognized defense to nonperformance of a contract, where that unforeseen event has made it impossible to perform one’s contractual obligations. In such situations, a party may be discharged from its contractual obligations under the doctrine of commercial frustration, which requires a showing that (1) events that give rise to facts and circumstances that are “totally unexpected and unforeseeable,” (2) the risk or event was not mentioned or provided for in the contract documents, or “custom,” and (3) as a result, performance of the contract is now impossible or commercially impracticable. Hilton Oil Transp. v. Oil Transp. Co., S.A., 659 So. 2d 1141, 1147 (Fla. 3d DCA 1995).

In Hilton Oil Transport, for example, a barge, owned by Hilton Oil Transport, had been detained by the government of Honduras and then subsequently, while being detained, the barge was destroyed in a storm.  Hilton Oil Transport had contracted with Oil Transport Co. S.A. (“OTC”), to tow the barge, and it leased the tug, Elizabeth, from OTC for $1,300/day.  OTC sued Hilton Oil Transport after the barge was destroyed in the storm and prevailed in its claim for damages under breach of the lease.  Elizabeth survived the storm and was able to perform; therefore, OTC was able to perform its obligations under the lease.  Hilton Oil Transport filed its appeal, asserting that it was excused from the lease because the Honduran government’s wrongful detention of its barge frustrated Hilton Oil Transport’s agreement with OTC; and, therefore, as a matter of law, it was relieved of its obligations to OTC.  The appellate court disagreed.

“‘The important question [in an impossibility inquiry] is whether an unanticipated circumstance has made performance of the promise vitally different from what should reasonably have been within the contemplation of both parties when they entered into the contract.’” Ferguson v. Ferguson, 54 So. 3d 553, 556 (Fla. 3d DCA 2011) (quoting 6 Williston, Contracts (Rev. ed.) § 1931 (1938)).  The Restatement (Second) of Contracts § 261 (1981) further provides that “[w]here, after a contract is made, a party’s performance is made impractical without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on the contract was made, his duty to render that performance is discharged, unless the language of the circumstances indicate to the contrary.” 

In applying these principles, the court in Hilton Oil Transport did not accept Hilton Oil Transport’s defense and agreed with the lower court, finding that (1) the arrest and detention of a chartered vessel based upon commercial disputes are not unusual occurrences in maritime commerce, and (2) that Hilton could not prove the second element necessary to establish the defense of commercial frustration—“the risk of event not provided for by contract or custom”.  Although there was not a provision in the contract that discussed the risk of arrest or detention, industry custom generally places the risk on the charterer, even where the charterer is not at fault.  Hilton Oil Transp., 659 So. 2d at 1147.  Thus, the Hilton Oil Transport case exemplifies how industry customs and your specific, contractual provisions will determine the applicability of these defenses.

            “Discharge by Supervening Impracticality” similarly occurs where, after a contract is made, a party’s performance is made impractical without his or her fault by the occurrence of an event, or the nonoccurrence of an event of which was a basic assumption when the parties entered into the contract.  Under these situations, the duty to perform may be discharged, unless the language of the contract, or other circumstances or industry customs, indicate otherwise.

However, it should be noted that an economic downturn, on its own, will not justify the application of commercial impracticality.  In the case of LSREF2 Baron, LLC v. Beemer & Assocs. XLVII, L.L.C., No. 3:10-CV-576-J-32JBT, 2011 WL 6838047 (M.D. Fla. Dec. 29, 2011), a party claimed that the economic downturn caused by the recent recession could not have reasonably been contemplated when entering into the contract, and therefore should have excused performance.  The court rejected this argument and cited to Ferguson v. Ferguson in stating that “‘[e]conomic downturns and other market shifts do not truly constitute an unanticipated circumstance in a market-based economy.’” Id. at *3 (citing Ferguson, 54 So.3d at 556).

However, in situations where a permit has been denied or where there is a government order that interferes with or prevents performance, the doctrine would likely apply.  For example, in one case, a property owner in Monroe County, Florida, sued a neighboring property owner to enforce a deed restriction.  The trial court ordered that a traffic control device, such as a gate, be installed. On appeal, the owner argued that it was excused from installing a gate and complying with the court order because the governing authorities denied the permit; and therefore, the doctrine of impossibility of performance applied.  The appellate court agreed and reversed the trial court.  Marathon Sunsets, Inc. v Coldiron, 189 So.3d 235 (Fla. 3d DCA 2016).

            So the question is as follows: are you currently in a situation where the performance of your current contractual obligations are becoming increasingly difficult or impossible to perform; or are you in a situation where the other party is not, or cannot, perform their contractual obligations?  

As you may have noticed, many of the “Stay at Home” orders, and their similarly named counterparts, have deemed construction sites to be “essential” and therefore still in operation. So, what if your construction site has been shut down anyways?  What if you can’t find workers?  What if you are an owner and concerned about proceeding further with the project, about health risks, or financing? Are you then justified in shutting down the project, and essentially breaching the contract?  Can you be sued for damages? How can you limit potential damages, and what steps should you take as an owner, a contractor, a subcontractor, a materialman, and/or a supplier?

            First, you should consult an attorney so that they can review the contract terms, and the facts and circumstances of your particular situation. If performance of your contractual obligations are still required by the other party(s) to your contract, you may need to request extensions of time and/or provide notice of delays under the contract, so as to provide a requisite paper trail to the extent damages are needing to be claimed later arising from that delay.  Now more than ever is a time to be diligent about paperwork and ensure that there is compliance with the requisite provisions and timelines set forth in the contract, particularly if you are experiencing or anticipating delays in performance or deliveries of materials and/or supplies.  

            If a particular project is suspended, even if temporarily, you may also have lien rights that need to be preserved in the interim.  Under Florida’s Lien Laws, a claim of lien must be recorded within the earliest of (a) termination of the prime contract under which the lien is being claimed; or (b) 90 days from the last furnishing of labor, service, or materials. There are various cases in Florida wherein the running of the 90 days is discussed; but, generally speaking, the rule is that the 90 days begins to run from the last date upon which the contractual work was performed. In other words, you should not generally consider any warranty work or corrective work to restart the 90-day period.  Thus, if the job remains idle for more than 90 days, and no lien has been filed, it is likely you would lose your lien rights.   Consulting with an attorney can also help you to determine whether you should record a claim of lien in the interim to protect your lien rights under the given circumstances.