Managing Truck Leases, Service Agreements and Corporate Leases Amid COVID-19 Pandemic
As the COVID-19 pandemic continues into its second month, impacting our society and economy, companies are working tirelessly to adjust and are straining to stop the financial bleeding from their contractual obligations.
Unsurprisingly, lease agreements for vehicles, trucks, office and warehouse equipment are among the various contracts that companies are struggling to interpret during this national crisis. This becomes of particular concern for businesses whose operations have been severely limited, or completely shut down, pursuant to federal and state directives.
Does Your Contact Contain a Force Majeure Clause?
A comprehensive interpretation of any given contract or lease agreement starts with a thorough review of the agreement itself. Generally speaking, if a lease contains a force majeure clause, the relationship will be governed by that clause. Such a clause will typically address how the parties are expected to proceed when an event occurs that is beyond the control of either party, and which was not contemplated at the time the contract was created. Some lease agreements may, for example, include a force majeure clause that addresses national emergencies, wars, riots, fires, labor disputes, shortages, and generally encompasses any other cause beyond the control of the parties. Unfortunately, these provisions are often drafted to primarily benefit the lessor and not the party who leased the items.
Common-Law Defenses May Apply to Contracts Without a Force Majeure Clause
Where a lease agreement does not include a force majeure clause, or any other language addressing emergency situations like the one we are presently facing, the parties to the contract must consider other legal theories and provisions of the contract that can be relied upon for an appropriate interpretation. Under Pennsylvania law, and possibly in other jurisdictions, the following are legal common-law defenses that can be raised in order to excuse performance under a lease agreement during the pendency of the COVID-19 pandemic:
• Frustration of contractual purpose
• Impracticability of performance of contract
• Impossibility of performance of contract
These common-law defenses become viable where the frustration of the purpose of the contract and or the impracticability/impossibility of performance has not been caused by the parties themselves. This novel pandemic and the effects that have followed are not the fault of either party, and since these events were not contemplated at the time of the formation of the contract and nothing in the contract itself addresses such events, the supervening impracticability and/or impossibility caused by the pandemic may excuse performance under the agreement.
In order to ensure that you do not waive these common-law defenses, it is wise to enter into discussions with the lessor to determine whether or not any accommodations can be made available for the duration of the pandemic, or if any subsequent agreement can be reached to either (1) defer payments and/or (2) add the obligations to the back end of the lease. Other options that may be worth considering include a temporary reduction in the rate of monthly obligations, and a determination of whether or not losses may be covered under the federal stimulus package, the Coronavirus Aid, Relief and Economic Security Act (the CARES Act).
Article 2A of the Uniform Commercial Code, which specifically governs lease agreements, includes provisions addressing excused performance by a lessor, and outlines default provisions for both lessors and lessees. A thorough review of the terms of your company’s lease agreement would be necessary to determine how these provisions impact your company’s obligations and remedies.
Review Insurance Coverage
In addition, it is important to consider whether your company has insurance policies in place that would allow for excuse of performance under these contracts. For example, your insurance policy may provide coverage for any one, or more, of the following:
• Contingent Business Interruption Coverage
• Crisis Management Coverage
• Civil Authority Coverage
• Upstream/Downstream losses due to closure of suppliers or customer locations due to fear of infectious disease
There may also be other sources of relief available to address the economic challenges your company is facing during this time. States like New York, Ohio, Massachusetts and New Jersey, are in the process of implementing legislation as a direct result of the COVID-19 pandemic. In these states, the proposed legislation would force insurers to provide coverage to businesses for losses incurred as a result of loss of use and occupancy and business interruption during the pandemic. New York’s proposed bill states that any payouts to insured companies would be subject to the policy limits of the policyholder, and insurers that pay out claims under this law can seek reimbursement from the New York Superintended of Insurance.