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ON-DEMAND INSIGHTS

Additional Insights into the Use of Force Majeure for COVID-19

Posted by Stacey Heller on April 13, 2021 at 10:50 AM

Force majeure and COVID-19A year into the COVID-19 pandemic, some businesses are still incurring losses due to COVID-related closures and other restrictions. As we shared last April, the possibility of mitigating those losses by relying on a force majeure provision depends on a variety of different factors, including which state law governs your contract, the exact wording of the force majeure clause contained within it, and other facts and circumstances, such as the subject matter of the agreement and/or the foreseeability of the pandemic at the time you entered into the contract.

Adding to the uncertainty surrounding the force majeure excuse is the fact that very few court cases over the past year have provided clarity on the applicability of force majeure for COVID-19 events when a contract’s force majeure clause is vague on this point, including in situations where the clause excuses performance due to “unforeseeable events” or “events outside of one’s reasonable control.” Despite numerous cases filed on various force majeure issues this past year, most are not dispositive because they are either still pending decisions, were settled or voluntarily dismissed before resolution by the court, or dealt with in some other fashion.

What we do know, however, is that many state courts tend to narrowly construe force majeure clauses by requiring them to specifically list the triggering event (e.g., “natural disaster,” “acts of god,” or even “pandemic”) in order for a party to avail themselves of the force majeure excuse. The reason behind such strict interpretation is that the courts are reluctant to terminate, suspend or change the terms of an agreement where the parties have freely and willingly allocated the risk themselves. An example of this position is the State of Florida, which typically has required an excuse to be expressly listed in the force majeure clause.1 Even when the courts require an excuse to be specifically listed, there are varying degrees of interpretation as to what is considered an included event. In the case of COVID-19, it is unclear whether the force majeure clause must specifically include “pandemic” or “virus” or if the terms “natural disaster,” or “act of God” would be sufficient.

Other states have adhered to a more liberal approach, allowing anything “outside of a party’s reasonable control” (the typical catch-all phrase) to be considered a valid excuse under force majeure, whether or not the contract is more specific than that2; but in most cases, only if such event was not caused by the negligence of the party trying to invoke the force majeure clause.3

Interestingly, the Texas courts have aligned themselves somewhere in the middle by adopting the approach of the U.S. Court of Appeals for the Fifth Circuit, which has held that when an event is not specifically listed in the force majeure clause, the courts will look for a catch-all phrase under which the event would reasonably belong.4 Further, in determining how broadly to apply the catch-all phase, the courts would rely on a foreseeability standard.5

Some states like New York seem to have shifting views on the use of force majeure. Although New York has historically adopted a strict interpretation by requiring a specific listing of the triggering event,6 a recent NY case appears to reveal a softening of the state’s stance. Specifically, in the JN Contemporary Art case7, the court found that a pandemic like COVID-19 is to be considered a “natural disaster” under the parties’ force majeure clause, thereby excusing the defendant from performance under the agreement. Although it is unclear whether other states might follow New York’s lead, it is worth noting that this New York decision was expressly based, in part, on a Pennsylvania court ruling which held that the COVID-19 pandemic qualifies as “a natural disaster.”8 Both of these rulings provide insight into how a court might interpret use of the force majeure clause due to a COVID-19 event, as well as precedent for future claims involving the same when a force majeure clause expressly mentions “natural disasters” as a valid excuse.

Finally, it is worth noting that since the onset of the COVID-19 pandemic, some courts have allowed the force majeure clause to be invoked on the basis that government mandated shut-downs (via state laws or executive orders) are legitimate triggering events if the force majeure clause specifically lists “unforeseen governmental orders or regulations” or something similar, and if such action, regulation, order or law has interfered with the parties’ performance under the agreement.9

The clear lack of continuity across state courts is just one of many variables making it difficult to predict the likelihood of success when seeking to excuse performance under a contract’s force majeure clause due to COVID-19 or a similar pandemic. Every contract is different, the facts and circumstances vary, and every jurisdiction has their own laws, executive orders, and court interpretations of force majeure. Therefore, when drafting a force majeure clause, especially if you are the party most likely to benefit from it, it is critical that you not only list as many factors as you can, but also that you include broad catch-all language. If you would like help with a force majeure provision, whether drafting one, or interpreting an existing one, or if you have questions about any other terms in an agreement, please contact Stacey Heller at sheller@outsidegc.com or (703) 403-5347 to discuss your company’s specific needs.

Stacey Heller is an experienced transactional attorney and has worked with companies in a variety of industries, including technology, retail, telecom, advertising, hospitality, and real estate and construction. Stacey regularly handles a broad range of work for her clients, from commercial agreements to real estate (commercial leasing and construction), as well as dispute resolution matters. Stacey can be reached at sheller@outsidegc.com or (703) 403-5347. 

 

1 In ARHC NVWELFL01, LLC v. Chatsworth at Wellington Green, LLC, 18-cv-80712, 2019 WL 4694146, at *3 (S.D. Fla. Feb. 5, 2019), the court held that “[f]orce majeure clauses are typically narrowly construed, and will generally only excuse a party’s nonperformance if the event that caused the party’s nonperformance is specifically identified.”

2 In JN Contemporary Art LLC v. Phillips Auctioneers LLC, No. 2020 WL 7405262 (S.D.N.Y. Dec. 16, 2020), the court indicated that pandemics do fall under the phrase “causes beyond the reasonable control of a party” since COVID-related restrictions on normal business activities were imposed by the government. This finding offers support for the position that COVID-19 or pandemics do not need to be specifically listed in the force majeure clause.

3 Goldstein v. Orensanz Events LLC, 146 A.D.3d 492, 492 (1st Dep’t 2017); See also Phillips Puerto Rico Core, Inc. v. Tradax Petroleum Ltd., 782 F.2d 314, 319 (2d Cir. 1985); Macalloy Corp. v. Metallurg, Inc., 284 A.D.2d 227, 227, 728 N.Y.S.2d 14 (N.Y. App. Div. 2001); Hershman Recycling, Inc. v. Am. Disposal Servs. of Mo., Inc., No. CV0104504069S, 2003 WL 283813, at *4 (Conn. Super. Ct. Jan. 28, 2003); Stand Energy Corp. v. Cinergy Services, Inc., 144 Ohio App.3d 410, 416, 760 N.E.2d 453, 457 (1st Dist.2001).

4 In Eastern Air Lines v. McDonnell Douglas Corp.532 F.2d 957 at 992 5th Cir. 1976, the court found that if a party specifically includes the event in the force majeure clause, the party “should be relieved of liability for the occurrence of such event regardless of whether it was foreseeable.”

5 In TEC Olmos, LLC v. ConocoPhillips Co.,555 S.W.3d 176, 181 (Tex.App.Houston [1st Dist.] 2018), (review denied August 30, 2019) the term “economic downturn” was not specifically listed in the force majeure clause, leaving the court to evaluate its foreseeability. Upon finding that an economic downturn was foreseeable, the court determined that force majeure did not excuse the defendant. In contrast to this ruling, the U.S. Court of Appeals for the Third Circuit has held that unforeseeability must be found, regardless of whether an event is specifically listed in a force majeure clause. (Gulf Oil Corp., v. Fed. Energy Regulatory Comm'n, 706 F.2d 444, 454 (3rd Cir. 1983).

6 See Kel Kim Corp. v. Cent. Mkts., Inc., 70 N.Y.2d 900, 902-03 (N.Y. 1987).

7 See Footnote 2.

8 In Friends of Danny DeVito v. Wolf, the petitioners were challenging the Governor’s authority to issue an executive order closing “non-life-sustaining” businesses, such as their golf course due to COVID-19.

9 In re Hitz Restaurant Group., No. 1:20-br-05012 (Bankr. N.D. Ill. 2020), the Illinois bankruptcy court was one of the first to rule on this issue during the COVID pandemic, holding that the Illinois executive order was “unquestionably the proximate cause of the debtor’s inability to pay rent, at least in part, because it prevented the debtor from operating normally and restricted its business to take-out, curbside pickup, and delivery.” See also, e.g.Duane Reade v. Stoneybrook Realty, LLC, 63 A.D.3d 433 (1st Dep’t 2009) in which the court was in favor of invoking the force majeure clause due to a “government prohibition,” which, in this case, was a temporary restraining order preventing construction of a new building.

Topics: commercial contracts, COVID-19, force majeure, force majeure clause

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