Ohio Commercial Litigation: Does COVID-19 provide an escape hatch for contractual obligations?

Attorney Casey A. Jones

Unless you’ve been living under a rock somewhere, chances are the current COIVD-19 pandemic has affected at least one, and likely multiple facets of your life. But how do these circumstances impact contractual obligations made pre-COVID-19? Can the pandemic or the economic turmoil it is has created serve as a justification or excuse for getting out of a contract? For instance, if you contracted to purchase real estate in February, before all of the furloughs and Stay at Home Orders, do you still have an obligation to close on that purchase? While the case law surrounding this question is likely to dramatically expand in light of recent events, the answer could likely be “no” under Ohio law, at least as it stands today.

Four Corners Rule

As an initial proposition, contracts are governed by the “four corners rule,” meaning they will be interpreted consistent with what appears on the face of the document. Chan v. Miami Univ., 73 Ohio St. 3d 52, 57 (1995) (“[A]n instrument must be considered and construed as a whole, taking it by the four corners as it were.”). Where unambiguous, no additional terms will be read into the contract, and the terms that are contained within the document will be given their ordinary meaning. Fidelity & Casualty Co. v. Hartzell Bros. Co., 109 Ohio St. 566, 569 (1924) (“This court cannot make a new contract for the parties where they themselves have employed express and unambiguous terms. In the construction of contracts the language employed must be given its usual and ordinary meaning.”).

Parties to a contract are, thus, bound by the contract’s plain and unambiguous terms and are obligated to do that which they have promised in the contract, subject to certain narrow exceptions…

Force Majeure

Contracts often contain “force majeure” clauses. Roughly translated, force majeure is Latin for “superior forces.” Often, you will see this interpreted or referred to as an “Act of God.” What this means in a practical sense is that there is some sort of unforeseeable, intervening circumstance that justifies non-performance under the contract. For example, you have a contract to rent an apartment unit (a lease) but, right before you move in, a bolt of lightening strikes the apartment building and it burns to the ground. Depending on the language of the force majeure clause, this would likely be a qualifying unforeseeable circumstance that could nullify the lease.

Relative to real estate transactions, force majeure clauses are perhaps more often seen in the commercial context than the residential. Many standard realtor’s contracts do not contain such clauses. These clauses may also appear in certain consumer transactions – think contracts for goods or services to be performed.

Consistent with the four corners rule, courts cannot “read in” a force majeure clause where one does not appear on the face of the contract. Therefore, if your contract does not contain a force majeure clause, you likely cannot claim it as a reason for terminating the contract or skirting your obligations thereunder. See Wells Fargo Bank, N.A. v. Oaks, 2011 Ohio Misc. LEXIS 4812, at *7 (Franklin C.P. June 24, 2011) (rejecting force majeure argument where the contract did not contain a force majeure clause).

Where a contract does contain a force majeure clause, courts are likely to interpret such clauses in a very narrow fashion. Thus, if the clause does not specifically contemplate disease, pandemic, unexpected unemployment, or business closures, it may not provide relief in the specific COVID-19 context.

What about changing financial circumstances or “impossibility” of complying with your obligations, more generally?

Despite the non-existence of an applicable force majeure clause, one might think that his or her general inability to pay that which they promised under the contract or worsening financial conditions might excuse performance under the contract. While this may seem like a logical conclusion at first glance,  the law dictates that “[m]istaken assumptions about future events or worsening economic conditions, however, do not qualify as a force majeure.” Stand Energy Corp. v. Cinergy Servs., 144 Ohio App. 3d 410, 416 (1st Dist. 2001); see also Wells Fargo, at *7-8 (“[E]conomic down-turn is a risk that every business person necessarily undertakes when they enter into a contract . . .That this country incidentally suffered an economic downturn during the term of their contract does not discharge them from their contractual obligations.”). “A party cannot be excused from performance merely because performance may prove difficult, burdensome, or economically disadvantageous.” State ex rel. Jewett v. Sayre (1914), 91 Ohio St. 85, 109 N.E. 636, 12 Ohio L. Rep. 291.

This body of case law generally speaks to “objective” versus “subjective” impossibility. While the law might sanction non-performance based on objective impossibility (i.e., no one could reasonably fulfill their obligations under the circumstances), it typically does not excuse performance based on subjective impossibility (i.e., a particular party cannot fulfill their obligations under the circumstances).

Can challenges posed by COVID-19, independent of financial concerns, create a justification for non-performance?

In the real estate context, for instance, what about the health risks posed by out-of-state buyers or sellers traveling for closings? Fortunately, we live in an era that offers a wealth of technological options here. For example, many title companies are offering “remote” closings.  If this is a concern for you, consider reaching out to Ivy Pointe Title for your closing needs, as they offer a staff of experienced title professionals, e-notary licensure in both Ohio and Kentucky, and remote closings, which allow parties to close on real estate transactions from the comfort and safety of their own homes where necessary.

We can help…

All this being said, parties to a transaction can often jointly agree to terminate or delay performance if they so choose, though a subsequent writing may be required to effectuate this agreement in a manner that will be enforceable and protect both sides down the road.  If you are party to a transaction and the other side has threatened non-performance where there has been no agreement to terminate or delay, these are likely some of the arguments you will see. On the other hand, if you are concerned about your ability to perform under a contract, there may be additional language within the “four corners” of your contract that could provide some relief. Contracts are exceedingly unique from one another, such that there really is no “one size fits all” approach.

Finney Law Firm has a team of legal professionals with experience ranging from real estate to employment to general commercial law, and we would be happy to review your contract and provide feedback as to your options or help with drafting amendments thereto. Please feel free to reach out to me at (513) 943-5673 or [email protected] to set up a remote consultation.

Additionally, our attorneys have authored a number of blog entries relative to the COVID-19 crisis and hosted webinars as to potential relief for employers, small businesses, and 1099 employees that may also be of interest. And for more on commercial or real estate transactions and “force majeure,” click here.

We hope you are all staying safe and healthy during this unprecedented time.

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