By Marc Whitfield, Partner
The existing international public health crisis created by the novel coronavirus, COVID-19, has also resulted in an international economic crisis, including within the United States as governors act to impose Stay at Home Orders designed to impede the spread of the virus. The combined impact of the virus and governmental restrictions has resulted in an unprecedented interruption of work and loss of business for many or most businesses and industries.
Human and Economic Impact of COVID-19
As of this article, Louisiana has reported 27,068 cases of COVID-19, which now exist in each of Louisiana’s sixty-four parishes, including 1,697 reported deaths. To combat the further spread of the virus, Governor Edwards issued a Stay at Home Order on March 22, 2020, which generally provided that: (i) all state office buildings are closed to the public, allowing only essential state functions to continue; (ii) all gatherings of 10 or more people in a single space shall be postponed or cancelled, excluding normal operations at locations like airports, medical facilities, office buildings, factories or manufacturing facilities, or grocery stores; (iii) placed all individuals within the state of Louisiana under a general stay-at-home order, and directed them to remain home unless performing an essential activity, subject to certain specified exceptions; and (iv) closed a number of “nonessential businesses” to the public, namely including: public amusement facilities, theatres, zoos, museums, entertainment venues, personal care and grooming salons, and shopping malls. Any businesses not included within the listings of closed businesses were ordered to reduce operations to continue with minimum contact with members of the public and essential employees, while requiring proper social distancing and complying with the imposed the 10-person limitation on gathering size.
On April 2, Gov. Edwards extended his Stay at Home order until April 30, and many people expect the April 30 deadline to be further extended. Some economists have estimated that Louisiana is facing a loss of approximately 20% of its workforce as a result of COVID-19. Aside from the general impact on day-to-day living, the combined impact of COVID-19 and the Governor’s adopted public safety measures has also seriously impacted the operation of businesses in Louisiana, seriously restricting or prohibiting many businesses from performing in compliance with their contractual commitments. Unfortunately, Louisiana is no stranger to economic and contractual uncertainty arising from unexpected catastrophic events such as hurricanes, and generally relies upon a body of law developed under the doctrine of force majeure to resolve legal disputes that may arise as a result of one party’s inability to perform as a result of an unforeseen catastrophic event. The legal analysis involved in such events, and their application during the course of this COVID-19 pandemic, is generally outlined below.
What Law Applies?
In cases involving a business that is unable to perform its contractual obligations as a result of the COVID-19 crisis, the first question to resolve is what law applies to the underlying contract or obligation? Many states generally do not recognize or accept force majeure as a contractual defense unless a force majeure clause is expressly included in the underlying contract. However, force majeure is generally recognized and applied under Louisiana law, even in the absence of an express force majeure clause, because force majeure is statutorily provided under Louisiana’s Civil Code, which provides, in relevant part:
Article 1873 - Obligor not liable when failure caused by fortuitous event
An obligor is not liable for his failure to perform when it is caused by a fortuitous event that makes performance impossible.
An obligor is, however, liable for his failure to perform when he has assumed the risk of such a fortuitous event.
An obligor is liable also when the fortuitous event occurred after he has been put in default.
An obligor is likewise liable when the fortuitous event that caused his failure to perform has been preceded by his fault, without which the failure would not have occurred.
Article 1875 - Fortuitous event
A fortuitous event is one that, at the time the contract was made, could not have been reasonably foreseen.
Article 1876 - Contract dissolved when performance becomes impossible
When the entire performance owed by one party has become impossible because of a fortuitous event, the contract is dissolved.
The other party may then recover any performance he has already rendered.
Is Performance Impossible?
Thus, if the underlying obligation is governed by Louisiana law, the doctrine of force majeure is generally available, even in the absence of an express contractual clause. However, it is important to understand that the general statutory scheme of force majeure in Louisiana is limited to circumstances where performance has been rendered “impossible” as a direct result of the unexpected event, and generally would not excuse non-performance where the performance is only rendered more difficult or costly.
Does Your Contract Protect You?
Because Louisiana’s Civil Code narrowly applies the force majeure doctrine, many parties choose to incorporate specific force majeure clauses in their contracts that expressly specify when and how contractual performance may be excused or delayed in the event of unexpected occurrence that qualifies as a “force majeure” event, which may be expressly defined in the contract. In such cases, the courts will generally adopt and enforce the contractual terms agreed upon by the parties. For example, if the applicable clause defines the “force majeure” event as “any unforeseen or unexpected event that is beyond the reasonable control of the party obligated to perform and renders performance impossible or significantly more burdensome or costly than reasonably contemplated by the party obligated to perform,…” the court will likely apply and enforce the definition agreed upon by the parties to the contract, and will not likely impose the statutory mandate that performance must be rendered “impossible” to qualify as a force majeure event.
The current COVID-19 crisis provides an important lesson for any business to seriously reconsider how it could be impacted by an unexpected future event, and whether its existing contracts are sufficient (i) to protect them and excuse their performance, or (ii) to require and ensure performance by the other party, in the event of an unexpected occurrence that could adversely impact contractual performance.
About Marc Whitfield: Taylor Porter Partner Marc Whitfield has practiced since 1988 in the areas of commercial business contracts and litigation, intellectual property law, commercial litigation and commercial transactions, including contract negotiations and litigation, intellectual property law licensing and litigation, involving including copyright, trademark and trade secrets, information technology contracts and litigation, data security, cyber security and data breach litigation, HIPAA and data licensing, and non-compete disputes.
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