By: Megan Hamilton
May 27, 2021
As everyone is well-aware, the COVID-19 pandemic has left too many businesses either closed or gasping for air. Governmental lockdown orders, major supply chain interruptions, and spikes in COVID-19 cases have all left certain businesses unable to fulfill their contractual obligations. The resulting hardship faced by businesses over the last year will undoubtedly have a lasting effect on contract drafting and negotiations in the years to come, particularly with respect to an often-overlooked contract provision: the force majeure clause.
Black’s Law Dictionary (9th Ed.) defines a force majeure clause as a “contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.” In the end, of course, the precise definition of any given force majeure clause lies in the contract itself. As federal, state, and local governments began imposing various social distancing and shelter-in-place orders last year, many businesses rushed to see whether the force majeure clauses contained in their contracts might offer any reprieve from the hardships they were facing.
In JN Contemporary Art LLC v. Phillips Auctioneers LLC, (S.D.N.Y. Dec. 16, 2020), an art seller sued an auctioneer for breach of contract after the auctioneer terminated the auction agreement pursuant to its force majeure clause. Ruling in favor of the auctioneer, the court found that the COVID-19 pandemic constituted a force majeure event even though the word “pandemic” was nowhere to be found in the contract. The court pointed to the contract’s broad definition of a force majeure event followed by numerous examples, including “natural disaster,” explaining that “[i]t cannot seriously be disputed that the COVID-19 pandemic is a natural disaster.” Id. at 7. Similarly, the court in In re Hitz Restaurant Group (Bankr. N.D. Ill. June 3, 2020) decided to reduce a tenant’s rent in proportion to the tenant’s reduced ability to generate revenue due to Governor Pritzker’s moratorium on indoor dining in March of 2020. The court reached this decision even though the lease stated that “[l]ack of money shall not be grounds for Force Majeure” because the lack of money was a direct result of “government action” and the issuance of an “order”—both of which were listed as force majeure events in the lease. Id. at 377.
Conversely, in a different case involving a commercial lease, the court held that the tenant’s breach was not covered under the force majeure clause. See In re CEC Entertainment, (Bankr. S.D. Tex. Dec. 14, 2020). In this case, the court did not even consider whether the pandemic constituted a force majeure event and instead concluded that because the clause at issue explicitly stated that it did not apply to the inability to pay rent, relief pursuant to such clause was not appropriate. The force majeure clause in Future St. Ltd. v. Big Belly Solar, LLC, (D. Mass. July 31, 2020)similarly failed to free a recycling bin distributor from its contractual obligation to pay its supplier. The court explained that because its failure to perform certain obligations preceded the pandemic, the distributor could not show that such failure was caused by the pandemic as required by the force majeure clause.
These cases and others showcase how a well-crafted force majeure clause can either make or break a breach of contract claim. A sound force majeure clause should define what constitutes a force majeure event, the type of breach excused by such an event, the relationship of the force majeure event to the non-performance, and the scope of any relief granted by the clause. The presence and construction of these elements may determine whether the parties will be held to their original obligations under the agreement.
Going forward we can expect that such contract provisions will be more carefully crafted and bargained for, specifically with respect to what constitutes a force majeure event and the effect of the event on the obligations of each party. For starters, parties should avoid using old, boilerplate language and relegating force majeure clauses to portions of the contract that typically do not require much review or negotiation. Instead, parties should consider their positions, what events may come into play, and whether open-ended definitions, like “circumstances beyond the reasonable control of the parties,” or a specific lists of events, such as “pandemic” or “public health crisis,” or both, are most beneficial. Parties should also give careful consideration to the type of breach that a force majeure event may trigger, the appropriate relief required, and what happens when the force majeure event ends. For assistance with drafting force majeure clauses and other contract provisions, contact your legal counsel.