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Legal Intelligencer: The Future of Business Contracts Post-COVID-19

Laptop with various paper coming out of itWhile it is likely that businesses will think to add force majeure clauses to future contracts, there is also reason to believe the specific language of these clauses could be modified. Likewise, there are other changes to be expected in post-pandemic contracts.

In the July 2, 2020 edition of The Legal Intelligencer Edward T. Kang, managing member of KHF wrote “The Future of Business Contracts Post-COVID-19.

Recently, I authored a column on force majeure clauses. In that space, I explained how many businesses have recently been turning to force majeure clauses in their contracts for protection in light of the COVID-19 pandemic. While it is likely that businesses will think to add force majeure clauses to future contracts, there is also reason to believe the specific language of these clauses could be modified. Likewise, there are other changes to be expected in post-pandemic contracts.

As for force majeure clauses, businesses may take different approaches as to the construction of these clauses to ensure pandemics and the disruptions that accompany them are included in the language. The first and perhaps most apparent approach, is to include precise language in the clause, detailing the exact circumstances in which these clauses are applied and offer protection. Undoubtedly, if businesses choose to go this route, many more contracts will specifically include the words “pandemic,” “epidemic,” or something to that effect that would reasonably cover another wave of COVID-19 or the like.

But, some businesses may choose to take the opposite approach and leave these clauses vague. As explained in my recent column, many courts have been interpreting language in these clauses, such as “including but not limited to,” as inclusive of the circumstances of the pandemic. Even though many recent force majeure cases have not yet been decided, past cases, like St. Joe Paper v. Department of Environmental Regulation, 371 So.2d 178 (Fla. Dist. Ct. App. May 15, 1979) still provide some insights into how courts might generally interpret such language. In this case, St. Joe Paper Co. was given a deadline to comply with federal and state air emissions standards. To comply with the standards, the company purchased and installed a dry scrubber fly ash collector, but it did not work as intended. The trial court ruled that, because the new device did not work, a force majeure had occurred. The language of the force majeure in the agreement in the case included the key phrase, “or any cause, whether or not of the same class as those specifically named above, not within the reasonable control of the company.” By deciding that a force majeure had occurred simply because the scrubber did not work as intended, the court implied that it was willing to read these clauses very broadly. Without the critical phrase at the end of the force majeure clause, however, it is unlikely that the court would have come to the same decision. Even on appeal, the appellate court, though affirming the decision against St. Joe Paper Co. on other grounds, again stated that they believed force majeure had occurred in this case. The case has set precedent in Florida for the broad interpretation of force majeure claims.

In Home Devco/Tivoli Isles v. Silver, 26 So.3d 718 (Fla. Dist. Ct. App. 2010), Home Devco was protected by the force majeure clause in its contract with Silver. The clause in this case included language similar to that in the St. Joe Paper case, listing “any other similar causes not within the seller’s control” as an event that would excuse its duties. Even though these cases were both decided in Florida, they teach a valuable lesson that could be appropriate to contracts in other states as well. The inclusion of all-inclusive phrases like those in the contracts in the cases above can make all the difference in courts’ interpretation of the enforceability of force majeure. Broad language is seemingly more prone to broad interpretation. Businesses, therefore, may choose not to list as many specific events, as it is impossible to include everything under the sun. Instead, they should consider including a key, catch-all phrase like, “including, but not limited to” as their security net in the clause, as it has seemed to prove fruitful in these earlier cases. This vague (or broad) approach to force majeure construction is recommended based on the outcomes of St. Joe Paper and Home Devco.

In either approach, however, the contract could specify the extent to which the force majeure clause excuses performance. Generally, parties’ obligations are discharged in entirety if the force majeure is invoked successfully. But, for many reasons (including maintaining the business relationship of the parties), contracts could include language that delays performance or fulfilment of the duties laid out in the contract until the pandemic or other relevant “unforeseeable” circumstances have passed rather than the outright discharge of the duties.

Accordingly, businesses may take other similar flexible approaches to draft their contracts to protect their collective interests. Construction contracts provide good examples of how contracts could change. Specifically, for construction or development businesses, there are a few different contract types, pricing models, and general strategies that are already available and may become more popular. Due to its flexibility, a more attractive option for contractors going forward, considering recent events, is the cost-plus contract, under which the owner reimburses the contractor for all agreed-upon costs plus an additional fee. This fee can be a fixed amount, which would probably be most effective in providing reassurance to the owner, as it ensures that the contractor cannot increase the costs as the project continues. This approach is also flexible in that it allows for the scope of the work or the materials used to be modified throughout the project. This approach can be especially useful and comforting in unforeseen circumstances, in which the supply chain for materials may be disrupted, or the timeline of the project changed drastically. One of the most important features that we might see in future construction or development contracts is a provision that allows for project slowdowns, rather than shutdowns. This would be beneficial to the owner and to the project as it would avoid having to suspend project permits, which can be both expensive and time-consuming.  Also, using this approach could protect the important relationship between the two parties as both would be sharing the risks of the project rather than just walking away from the project.

Even though these options are generally used by contractors or developers, other businesses may be able to translate these contract types and pricing models to fit their own needs. The basic principles of flexibility and cooperation can undoubtedly be used in other business contracts and might very well be in the coming years. Businesses can work with their clients to make pricing arrangements that, at least, reassure both parties that there will be an element of stability to their contract no matter the circumstances. They can also have discussions with their client and even include a provision in their contract that establishes that, in the event of a disruption like a pandemic, collaborative approaches will be the first step in tackling the new challenges rather than court action. There may also be provisions that allow for flexible schedules, just as there may be provisions allowing for project slowdowns in construction contracts. Including language that provides for specific dates to be extended depending on the needs of either the business or its client again could bring some much-needed comfort to all parties in such unforeseeable situations and prevent hostile arrangements.

The franchise agreement at issue in E2W v. KidZania Operations, S.A.R.L., No. 1:20-cv-02866 (SDNY, May 11, 2020) exemplifies another flexible approach to drafting contracts. In the agreement, KidZania grants E2W the licensing rights to KidZania facilities, but includes a provision that outlines scenarios in which the franchisor can terminate the agreement. The force majeure clause in the agreement states that they could do so in the event that force majeure results in the closure of all licensee facilities for more than six months. Businesses may want to take a similar approach in setting an extended or revised timeline in their contracts in the event of a pandemic or the enactment of force majeure clauses. This would provide some relief to the vendor, as, in this example, if they are able to terminate the agreement with the party who cannot pay the required fees, they would then be able to license the rights to another party who would be able to do so. It could also, if included in the force majeure clause as it is in this agreement, potentially protect the vendor from force majeure defenses, as both parties will have agreed to it at signing. This approach is more flexible because it does not result in immediate termination and acknowledges the likely impacts of a pandemic, but offers the vendor or franchisor some security as well, making it an attractive option.

It is likely that businesses and clients alike will be more willing to take new approaches in the future with their contracts, as many have been burned by the traditional strategies and language used pre-COVID-19. In these ongoing, uncertain times, one thing is certain: post-pandemic contracts will be different in more ways than one. As always, businesses may want to consult with their legal counsel to determine which type of contract to choose or what specific language to include in force majeure clauses or other relevant provisions. They can best advise on the proper course of action for your particular business. Our law firm provides more information on business litigation issues as they relate to COVID-19, together with steps to prepare for reopening and reducing liability and likelihood of being sued successfully.

Edward T. Kang is the managing member of Kang Haggerty & Fetbroyt. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@khflaw.com.

Reprinted with permission from the July 2, 2020 edition of “The Legal Intelligencer” © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

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