Problems Meeting Your Obligations Due to COVID-19? Fundamentals of Contract Law May Help.

The COVID-19 pandemic is causing widespread business disruptions and the cannabis industry is not immune. The pandemic and resulting stay-at-home orders have already prevented many companies from meeting their contractual obligations to distributors, retailers, lenders, landlords and other vendors. Fortunately, doctrines of California contract law may offer a remedy and provide some relief.

For example, a “force majeure” clause, may allow a party to cancel or postpone performance if that performance is rendered impossible by an unforeseen calamity. Understandably, these provisions, often called “act of God” clauses, have a fairly high threshold. Specifically, the event must be both severe and unexpected in order to provide relief. Force majeure clauses can be specific as to the kinds of calamities that will trigger their protections or they can be vague. If effective, the provisions could either void the contract entirely or postpone performance until the qualifying event ends. Either way, the contract in question and the facts presented should be carefully considered to determine whether a force majeure clause exists and may be effective in offering relief.

Even if a contract does not contain a force majeure clause, there are similar protections available under California law, such as the doctrine of “commercial frustration.” Largely developed during World War II, this doctrine may enable a party to cease performance under a contract if an unforeseen event has rendered performance under the contract impossible. For example, in one 1944 California appellate case, the Court held that a governmental order that prevented the involved business from operating constituted just such a “frustrating event” as to relieve the business of its obligations under its contract. (20th Century Lites, Inc. v. Goodman (1944) 64 Cal. App. 2d. Supp. 938.)

To be effective, force majeure clauses and the commercial frustration doctrine must meet similar requirements. First, the event in question must have been unforeseeable when the parties entered into their contract. If the event was foreseeable, it will most likely be viewed merely as a business risk and be insufficient to enable any protection or relief. While the courts have not yet addressed the COVID-19 pandemic, given its scope and, more importantly, the unprecedented shelter-in-place orders mandated at both the state and county level, the COVID-19 pandemic should qualify as “unforeseeable” under the two legal doctrines. Second, the event must make it impossible for the contract to be performed, not merely more expensive or burdensome. For example, if the party seeking the protections of these two doctrines was having difficulty meeting its obligations before the pandemic, it is unlikely a Court would find in its favor on this issue. Therefore, how these requirements will impact a business operating in the space will depend upon a sober review of the facts on a case-by-case basis.

The COVID-19 pandemic and the manner in which it has been and is being addressed is unprecedented. Many cannabis businesses have been forced to change their practices and seek creative solutions to new and evolving problems. Force majeure clauses and the commercial frustration doctrine may be able to help those who are, despite their best efforts, struggling to meet their contractual obligations. At the very least, by properly and timely invoking these doctrines, businesses may be able to leverage themselves into a fair and equitable renegotiation of those contracts impacted by the pandemic. This is not a one-size-fits-all situation so those who have been or are being harmed by the pandemic should consult an attorney sooner rather than later and have their contracts and the particulars of their situation evaluated. We at Huguenin Kahn hope this summary has been helpful and stand ready to assist any person or entity operating in the cannabis space with their legal needs during these challenging times.

The attorneys at Huguenin Kahn are available to address any concerns you have relating to the above or other aspects and implications of COVID-19, including, but not limited to, employment disputes, whistleblower concerns, or other matters relating to the shelter-in-place restrictions.  Please call us at 530-955-3080 or e-mail us at info@hkcannabislaw.com.  You can also follow us on social media @hkcannabislaw.