With the outbreak and now resurgence of the coronavirus (COVID-19), we have now seen months of uncertainty with additional uncertainty as the Iowa state government and national government has issued new restrictions, lockdowns and limitations on gatherings. This has upended much of our lives, from small businesses, to schools, sporting events, weddings, and family gatherings. One of the largest legal issues that has arisen with the pandemic has been the implications the virus has had on contract obligations.
If you have been on either end of a contract at risk of termination or modification due to coronavirus, either as a business owner, customer/client, commercial landlord or tenant, you likely have questions and are looking for guidance. This article will provide some initial advice to help you through these issues.
One of the most common contract provisions that will help you navigate your contractual rights and obligations is what’s called a “force majeure” clause. This clause is often referred to as the “act of God” clause. This provision allows a party to cancel all or some of a contractual obligation if an unforeseeable or uncontrollable event makes performance of a contract either impossible or impractical.
It’s important to first determine whether your contract has one of these clauses. The specific language within the contract, the situation at hand, and the applicable state law will all be considered to make a determination as to whether the contract should be modified or cancelled.
Force Majeure Clauses in Iowa
The Iowa Supreme Court defines force majeure provisions as a clause that “allocate(s) the risk if performance becomes impossible or impracticable as a result of an event or effect that the parties could not have anticipated or controlled.” The Iowa Supreme Court noted that these clauses aren’t intended to shield a party from normal risks associated with an agreement. A small number of courts have actually analyzed the application of force majeure provisions to the current Covid-19 pandemic and the rulings have been split. Most of the split has come due to the language of the clause within the contract. Should the clause be broadly defined, you may be able to terminate and walk away from your contract.
If you are concerned about whether your contract can terminate, consulting a lawyer to both review and help guide you through your contract issues can be helpful.
Impossibility and Impracticality
Even if your contract doesn’t have a force majeure provision, you may still be able to get out of your contract. Common law allows for contracts to be terminated if the contract will be impossible or impractical to perform. This provision is most applicable with the ever-changing guidelines and restrictions coming from the state of Iowa, CDC, and WHO. It’s worth noting here that impracticality does not mean that minor inconveniences such as mask wearing or even some capacity restrictions will nullify the contract. Restaurant/event space closures, extreme capacity restrictions (think a 400 person even with a capacity restriction of 10), bans on indoor dining, or stay at home/quarantine orders may qualify, however.
Should you believe your contract may be impossible or impractical to perform, it’s important to have an analysis both of the contract as well as any and all applicable guidelines at the time the contract is supposed to be performed.
Other Considerations
Prepare, prepare, prepare. With the Coronavirus pandemic now 9 months in, there is a strong chance that you may be entering into contracts while the pandemic is still going on. If you are a business owner or even a customer or tenant, you should include a provision in your contract addressing the pandemic specifically, outlining what will happen in instances that the virus causes the contract to not be able to be performed. Some options can include partial refunds of deposit money, options to reschedule the performance of the contract or simply being able to walk away from the contract completely.
There is also something you can do if you are already into a contract and worried about potential cancellation. The contracting parties can enter into an additional contract either for termination or modification of the original contract. This is an agreement by both parties addressing the pandemic and, in consideration of the new circumstances, outlining the obligations of the parties in the instances that the coronavirus changes the performance under the contract.
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