Force Majeure Clauses & the COVID-19 Pandemic

June 9, 2020

 A decision handed down on June 3, 2020, by the United States Bankruptcy Court for the Northern District of Illinois is one of the first to address the subject of force majeure in the context of the COVID-19 pandemic. The question presented was whether a Chapter 11 debtor – in this case, a Chicago restaurant – could escape its obligation to pay post-petition rents by invoking a force majeure clause in the wake of an executive order temporarily prohibiting dine-in restaurant services. In ruling that the debtor’s rent obligations were reduced “in proportion to its reduced ability to generate revenue due to the executive order,” the Court provided a glimpse into how force majeure provisions might be interpreted in light of pandemic-related business interruptions. The case – In re Hitz Restaurant Group, Bankruptcy No. 20 B 05012 – can be seized on by commercial tenants seeking rent relief through either negotiation or litigation while the pandemic remains ongoing.

 

Black’s Law Dictionary (8th ed.) defines a force majeure clause as “a contractual provision allocating the risk if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled.” Found in most commercial contracts, a force majeure clause allows a party to suspend its contractual obligations either in-whole or in-part under certain circumstances without fear of facing legal liability. Force majeure provisions can either explicitly define what those circumstances are or simply refer to them in generic terms such as acts of God, national emergencies, or disasters.

 

The COVID-19 pandemic has disrupted just about every American industry in an unprecedented fashion. While it is still too early to gauge the pandemic’s full economic impact, current statistics paint a bleak picture of how long the U.S. economy will take to bounce back. A more immediate concern for many U.S. businesses is whether their inability to carry out certain contractual obligations because of COVID-19 can be excused through the principle of force majeure. The answer to that question should be relatively clear if a contract specifically includes a force majeure clause containing language that excuses performance in the midst of a pandemic or similar widespread public health crisis. On the other hand, determining one’s obligations can be a lot more difficult if a force majeure clause is susceptible to competing interpretations, or if a contract contains no force majeure clause at all. A business facing this latter scenario may still be able to invoke the doctrine of impossibility – a common law defense to non-performance that is recognized by most state courts.

 

Interpreting whether a force majeure clause is sufficient to excuse a specific instance of non-performance generally involves an analysis of four key factors. The first is the precise language of the clause. As previously stated, force majeure clauses can be drafted in varying degrees of specificity. The second factor is whether the force majeure event – COVID-19, in this case – was unforeseeable to the parties. Third, a party that is seeking force majeure protection must establish that the event caused their inability to perform. An example of this would be an American auto manufacturer forced to temporarily suspend production because of serious and ongoing supply chain problems. A party seeking force majeure protection must finally submit evidence showing that the effects of the unforeseeable event were so severe as to make performance either actually or practically impossible.

 

It is important for businesses to think prospectively with regard to force majeure clauses as the COVID-19 pandemic is likely to impact both domestic and international commerce for the foreseeable future. Looking forward, those who draft new contracts or amend existing ones are strongly encouraged to craft their force majeure clauses to address pandemics and similar phenomena that trigger a widespread pause in normal economic activity. Otherwise “stock” or “boiler-plate” force majeure clauses should also be reexamined with respect to notice requirements, obligations to mitigate non-performance, rights of contract termination, and similar subjects that force majeure clauses often address. Another option is to insert a separate stand-alone clause that specifically covers instances of non-performance caused by COVID-19 and governmental response measures. Of course, drafting a force majeure clause is never and should not be done in a vacuum. The specific language of the clause will be highly dependent on the subject matter of the contract, the industry at issue, the relative bargaining power of the parties, the applicable governing law, and other relevant factors.

The above information is brought to you by Curran Antonelli, LLP – a bankruptcy, litigation and transactional law firm that represents a broad range of businesses and corporate entities, private equity funds, as well as governmental agencies and other interested parties in all phases of the bankruptcy process and in bankruptcy related transactions and litigation.  As advocates and trusted business advisors, our well-established foundation of knowledge and understanding of our clients’ business interests, enables our attorneys to deliver unparalleled individualized attention to our clients of all sizes with their litigation and corporate transactional needs.

 

 

Share on Facebook
Share on Twitter
Please reload

© 2017 by Curran Antonelli

Disclaimer