There are few corners of the world that have not become concerned, if not obsessed, with the evolving coronavirus outbreak. In the Coastal Bend, we’ve been fortunate thus far to have some of the lowest numbers of confirmed cases; however, it’s hard to say how things will play out in the coming months. The focus right now is, of course, preventing the spread of COVID-19. But as a business owner and attorney, this raises legal concerns for me that I think the public should consider.
Think on this – Centers for Disease Control and Prevention spokesperson, Nancy Messonier, has indicated in a March 9, 2020 call with reporters that the trajectory of the outbreak could take us into 2021. Now, consider the number of contracts by which you are currently bound. Service contracts, vendor contracts, rental agreements (both commercial and residential), purchase contracts, loans and mortgages…some of which we’ve entered into without reading thoroughly. My worry is that if COVID-19 puts enough of a strain on the economy, many people out there may not be able to live up to their contractual obligations. Depending on our role in the contract, you need to be aware of your responsibilities and/or remedies should you find yourself needing to enforce or defend your interests.
ENFORCING CONTRACT PERFORMANCE
What happens if you’ve contracted with someone who isn’t able to perform their obligations? Here’s a few real-world examples:
You’re a landlord and your tenant has become ill, or has had to care for someone who was ill, or wasn’t even ill at all but was quarantined and unable to earn their upcoming paycheck? The situation snowballs and one month’s missed rent becomes two. You relied on receiving those rental payments to make your car payment. How do you recoup your rental income? What if you can no longer pay for your car?
- Now, flip the script and you’re the tenant behind on your rent. You aren’t avoiding paying rent because you don’t want to; you simply don’t have the money. How do you protect yourself from eviction? Can you?
- You’ve made a sizable contribution to the local Tejano Fair and due to the outbreak and quarantine, the event has been cancelled. How do you get your investment back?
- You’ve purchased tickets to a major sporting event or a concert that has now been cancelled and they refuse to return your money. Can they do that?
And payment isn’t always the way a party completes its contract obligations. What about performance of an act instead of a money payment? For example:
- You contract with someone to build them a hot-rod within three months in exchange for use of their commercial building as a mechanic’s shop. You’ve been unable to receive a shipment of parts that you need to complete the job within three months because you can’t receive a shipment from the foreign company that makes the parts?
- In each of these instances, the inability to perform or pay isn’t really anyone’s fault, it’s due almost exclusively to the Coronavirus outbreak and the extraordinary conditions it has caused.
Now that we have an idea of how the virus can cause problems that might get you into a contract dispute, let’s get to know some common contract clauses you should be familiar with:
FORCE MAJEURE CLAUSES
Force majeure clauses cover ‘acts of God’ and are enforceable under Texas law.[1] You may have become familiar with this clause after Hurricane Harvey. Generally speaking, the term “force majeure” refers to an event, such as an “Act of God,” beyond the parties’ reasonable control that intervenes to create a contractual impossibility and thereby excuse contract performance.[2] A force majeure clause does not relieve a contracting party of the obligation to perform, unless the disabling event was unforeseeable at the time the parties made the contract.[3] In my professional opinion, the current viral outbreak is unforeseen. This doesn’t mean the person on the other side of your contract would agree.
When it comes to determining the meaning of a clause, Texas courts look at the plain language of the contract, and it is the burden of the person who drafted the contract to clear up any inconsistencies or ambiguities. Force majeure clauses, then, should be able to tell a party to a contract specifically what is covered and what is not. If a viral outbreak like COVID-19 is not specifically mentioned (which it wouldn’t likely be), then it would likely end up being a judge or jury who decides whether or not contract performance would be enforced.
In the long run, whether or not a court will excuse a party’s nonperformance due to the effects of the Coronavirus will depend a great deal on what the clause dictates.
TERMINATION CLAUSES
Contracts usually have a clause in which the parties have agreed on its duration. At the end of a specific period of time, the contract can either terminate or renew on specific terms. The clause’s language usually provides for either automatic expiration once a particular project or set of services has been completed, or a term that will expire after a set time period. Some contracts require notice of say, 30 or 60 days from one party to another before the contract terminates. If one of the parties doesn’t notify the other of its intent to terminate, the contract automatically renews. This is typical in residential leases or some consumer contracts, such as contracts for cellular service.
A sample Texas termination clause for a business contract reads:
“1. This contract shall be for an initial period of 12 months from the commencement date. Either party will have the right to terminate the contract by giving at least 30 days’ notice in writing to the other party to expire at the end of the initial period or at any time after that.
2. Either party may terminate this contract by written notice to the other at any time if that other party:
(a) commits a material breach of this contract and fails to remedy the breach within 14 days of being required to do so in writing; or
(b) becomes insolvent, or has a liquidator, receiver, manager or administrative receiver appointed.”
Simple enough. But a sample termination clause in a Texas residential lease agreement might read:
“This Texas Lease Agreement shall commence on [date] and continue as a lease for term. The termination date shall be on [date] at 11:59 PM. Upon termination date, Tenant shall be required to vacate the Premises unless one of the following circumstances occur:
(i) Landlord and Tenant formally extend this Texas Lease Agreement in writing or create and execute a new, written, and signed Texas Lease Agreement; or
(ii) `Landlord willingly accepts new Rent from Tenant, which does not constitute past due Rent.
In the event that Landlord accepts new rent from Tenant after the termination date, a month-to-month tenancy shall be created. If at any time either party desires to terminate the month-to-month tenancy, such party may do so by providing to the other party written notice of intention to terminate at least 30 days prior to the desired date of termination of the month-to-month tenancy.”
Tricky, eh? Lastly, check out this termination clause on a vendor agreement between a municipality and a telecommunication service:
Initial Term.
The initial Term of this contract shall commence as of 12:00:01 a.m., Central Time on the Effective Date and continue until 11:59:59 p.m., Central Time, on [date], unless this Contract is terminated earlier as provided herein, in which case the initial Term of this Contract shall end at 11:59:59 p.m., Central Time, on the effective date of such termination.
Extension(s).
By giving written notice to [vendor] no less than 90 days prior to the expiration date of the initial Term or the then-current Renewal Term, [municipality], upon mutual agreement of the Parties, shall have the right to extend the Term of the contract for up to five years from the expiration of the initial Term, in any combination of months or years as necessary to complete the purpose of this contract. Upon mutual agreement, [municipality] may extend the contract more than once up to a total of an additional five year period (each a Renewal Term). The exact period(s) of the extension(s) shall be specified in the [municipality’s] notice of extension. The total period of time during which the contract is in effect is the Term.
I’ve been a practicing attorney for almost twenty years and I’ll be the first to put my pride aside and admit there’s still some mental gymnastics that go on when picking through these clauses. Consult with an attorney, but pay attention to these termination clauses because you may have a right to terminate regardless of, and as a preemptive measure to, any COVID-19-related economic hardship on your or your contracting party’s behalf.
DISPUTE RESOLUTION CLAUSES
If you’re past the point of taking preemptive measures, you may need to begin the process of dispute resolution. You’ll want to reference your respective dispute resolution clauses. This caluse may simply be titled, “Dispute Resolution”, but if not, references in the titles to mediation or arbitration will likely appear.
Regardless of the clause’s title, there a several steps parties can take before litigation, like informal dispute resolution, mediation, and arbitration. Sometimes, the contract will quite obviously lean toward mediation or arbitration, or a combination of both where one mediation precedes arbitration. Other times, the language references Texas code when discussing a party’s remedies. Usually, you’ll want to try and resolve your issue informally, but following your contract’s notice provisions and sending notice to the other party that they have so many days to cure a default of breach.
If you’re the breaching or defaulting party, it can sometimes be good to send a notice that you intend to cure by a particular date. At any rate, communication at this stage is key, and you should always document it in case it becomes important to prove your attempt to mitigate damages later.
Should informal resolution fail to resolve the breach, the parties may be bound by a mediation clause that requires them to seek the services of a mediator, which can be done in some cases through your county’s alternative dispute resolution center for a small fee. Mediation will allow the parties to communicate their concerns through a trained neutral party and come up with a solution that makes both parties whole. This may require some compromise, but it’s often less costly than litigation. In the event of litigation, signed mediated settlement agreements between the parties can be enforced as a contract in Texas courts.
Arbitration is quite similar, except that it can be more binding to a degree than a signed mediated settlement agreement. Also, a contract might have you going immediately to arbitration without mediation, which is usually a more comfortable and less formal affair. Notwithstanding the foregoing, arbitration is still a less expensive route than litigation.
Which brings us to the “L” word. It’s definitely not love, and some may say it’s far from it. Litigation is typically the last resort when your dispute cannot be resolved informally or semi-formally. Should COVID-19 bring you here, first and foremost, consult an attorney. But in choosing one, make sure you check out what state you’ve agreed to litigate in. There is another clause usually called “Choice of Venue” that could have you litigating on an out-of-state party’s home turf.
The attorneys and staff at the Law Offices of Alex R. Hernandez, Jr. PLLC hope you stay healthy during this nationwide crisis. If you find yourself needing the assistance of an attorney, please feel free to contact my firm. From a professional and personal perspective, I’m in the same boat as so many people worldwide. We simply just want to be a source of assistance for you and your loved ones during this crisis. Well-wishes to all.
Alex R. Hernandez, Jr.
[1] See, e.g., Rowen Co. v. Transco Exploration Co., 679 S.W.2d 660, 664 (Tex.App.—Houston [1st Dist.] 1984, writ ref’d n.r.e.), cert. denied, 474 U.S. 822, 106 S.Ct. 74, 88 L.Ed.2d 61 (1985).
[2] See Perlman v. Pioneer Ltd. P’ship, 918 F.2d 1244, 1248 n. 5 (5th Cir.1990); BLACK’S LAW DICTIONARY 645 (6th ed. 1990).
[3] See Valero Transmission Co. v. Mitchell Energy Co., 743 S.W.2d 658, 663-64 (Tex. App.—Houston [1st Dist.] 1987, no writ)
