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COVID-19 and Force Majeure Today
My colleague Gabe was waiting for an answer from me as to whether his commercial tenant could legally stop paying rent during the COVID-19 crisis under a force majeure theory. I told him the force majeure analysis today generally would not be much different than during the Great Influenza of 1918, although it would probably be more involved. Like Citrus Soap, discussed in PART ONE, a court would start with the contract between the parties, so I asked Gabe, “What does your lease say about delays in performance and unforeseen events? In other words, does your lease have a force majeure clause?”
Black’s Law Dictionary 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.” “Force majeure” literally means superior or irresistible force, i.e., an act of God. Force majeure is a narrow exception to the rule that contracting parties are bound to perform their obligations under the contract or pay damages. Many commercial contracts and leases contain force majeure clauses to allocate risk for unforeseeable circumstances and provide for notice if performance is to be suspended or excused under such circumstances. If Gabe’s lease contains a force majeure provision which shifts the risk for unforeseeable circumstances to Gabe and the language of the provision clearly includes a global pandemic, his tenant may have a point. A court will typically enforce a clear and unambiguous force majeure clause. While Gabe looked through his files for his lease, I began looking through my force majeure legal file and I came across some of my notes.
The best force majeure provisions are narrow enough to prevent parties from misusing them to avoid the consequences of an unfavorable bargain, but broad enough to provide necessary relief if a material unforeseeable event does occur. The benefit of broad force majeure clauses is they provide flexibility. The negative is it is difficult to predict how a court will interpret such clauses because they add ambiguity to the analysis. One judge’s idea of what might be unanticipated or beyond a party’s control could be quite different from another judge’s interpretation. Also, if a force majeure clause is too broad, it may buffer a party against the normal risks of a contract. A force majeure clause that excuses a party from the consequences of risk that the party assumed in the deal nullifies a central term of the contract and will not excuse that party’s performance.
Narrow force majeure provisions provide a list of specific events and typically state that the list is not exclusive, e.g., “including without limitation” language. This provides clarity to the parties of what exactly will relieve their performance, but it may be difficult to anticipate all of the possible events which could disrupt the contract. A global pandemic has never been at the top of my list of events likely to delay my contracts. Additionally, many courts are reluctant to apply force majeure relief to situations not listed in a narrowly drafted clause, even if the list itself provides that it is not exclusive.
In the construction industry, most force majeure clauses allow for an extension of time for completion of the project if certain conditions cause a delay in performance of the work beyond the contractor’s control. To a lesser extent, these clauses may also allow for an adjustment in compensation for excusable delays in performance. For example, the AIA A201 (2017) contract form provides, “If the Contractor is delayed at any time in the commencement or progress of the Work … by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions [which are unforeseen and abnormal], or other causes beyond the Contractor’s control; … [or] by other causes that … justify delay, then the Contract Time shall be extended for such reasonable time ….” Notice the broadening catch-all phrase, “or other causes beyond the Contractor’s control,” which expands the scope of the clause.
Although the cases are scarce, Florida courts have upheld such broad force majeure clauses. For example, where the terms of a developer’s contract excused a delay in performance for “any other condition” beyond a developer’s control, excessive rain which caused delays in the developer’s performance was held to constitute such a condition excusing performance. In another case, a contractor’s delay in construction of nine homes was excused where the contractor’s president suffered a heart attack and the contract required construction to be completed within six months “barring strikes, non-availability of materials or other causes beyond control of [the contractor].” In a third case, a paper company was excused from paying liquidated damages, even though a design error delayed its compliance with an agreement with the Department of Environmental Regulation, because the error was outside the company’s control and the contract provided that, if a force majeure event occurred, liquidated damages would be mitigated. The definition of force majeure in the contract included “other industrial disturbances … not within the reasonable control of the company.”
In the commercial lease context, a federal court in Florida recently granted summary judgment against a tenant nursing home, evicting the tenant because the tenant had breached the lease by failing to pay the landlord over $5 million in rent. The lease provided “Tenant shall not be deemed to have committed an Event of Default … if such event resulted from a Force Majeure Event,” which was defined to include “government action; or [any] other similar cause or circumstance which is not in the reasonable control of either party.” The tenant argued that changes in government funding, which resulted in $7,000,000 in lost revenue, constituted a force majeure event because it was government action that was not in the tenant’s control. The court found that the tenant failed to prove that its failure to pay rent resulted from the government funding change, as contemplated by the force majeure clause. The court relied upon cases which have rejected force majeure arguments where government monetary policy simply made contracts unprofitable, i.e., where deregulation of savings institutions resulted in an increase in interest rates and a slump in the timber market; where a collapse in world oil prices was caused by Saudi Arabia’s government; and where government orders denied a utility company’s request to pass increased coal prices along to customers. A force majeure clause is not intended to buffer a party against lost profits, a normal risk of any commercial contract.
Cases outside Florida have excused performance under broad force majeure commercial lease provisions. For example, a landlord’s obligations under a commercial lease at the destroyed World Trade Center were excused because a force majeure clause in the lease provided that the landlord would not be liable for any failure, delay or interrupting in performance “due to causes or conditions beyond the control of the [landlord],” which included acts of third parties. The New York court held that claims by the tenant for recoupment of rent from the landlord were barred by the force majeure clause “which expressly excuse[d] the performance of the lessor under circumstances such as those presented by the events of September 11, 2001.”
In another 9/11 case, the economic impact of the terrorist attack on a conference scheduled at a Hawaiian resort did not allow the conference organizers to cancel the event under a force majeure provision. The provision excused the parties’ performance if acts of terrorism or any other emergency beyond the parties’ control made it “inadvisable” to perform their obligations under the contract. The conference organizers claimed that cancellation was justified because the September 11, 2001 terrorist acts severely disrupted travel, decimated the tourism industry, and created a pervasive sense of fear that gripped the country, which made their performance “inadvisable.” The hotel countered that the actual reason the conference organizers cancelled the event was because of the economic downturn, which although due in part to September 11, was too attenuated from the events of September 11 to excuse performance under the force majeure clause. The court acknowledged that the force majeure clause did, in fact, contain the word “inadvisable,” but reasoned that the term had to be considered in context with the remainder of the clause, which entails unanticipated and uncontrollable events that render performance impossible or impracticable. Relying on cases which have held that nonperformance dictated by economic hardship is not enough to make performance impracticable, the court concluded that force majeure clauses do not excuse performance for economic inadvisability, even when the economic conditions are the product of an unforeseen, uncontrollable, force majeure event. Under this reasoning, Gabe’s tenant might still be responsible for paying rent, even if the lease has a force majeure clause, because the tenant’s circumstances could be seen as merely a financial hardship, rather than impossible or impracticable.
Impossibility, Frustration of Purpose and Commercial Impracticability
After reviewing Gabe’s lease, we determined it did not contain a force majeure clause, so we were a little baffled that Gabe’s tenant sent him a force majeure notice. We speculated that Gabe’s tenant may be setting the groundwork for defenses based upon the doctrines of “impossibility of performance,” “frustration of purpose,” and “commercial impracticability.” Impossibility of performance means it is totally impossible to do what was agreed in the contract. Frustration of purpose requires that (1) the event giving rise to the claim must be totally unexpected and unforeseeable; (2) the risk of the event must not be provided for, either by the language of the contract or by custom; and (3) the performance of the contract must be impossible or commercially impracticable. Courts may relieve a party from performing a contract if any of these doctrines apply but, as with force majeure, courts are reluctant to excuse performance based upon impossibility or impracticability when performance is merely inconvenient, profitless, and expensive to the other party. The application of these doctrines is a very fact-specific inquiry.
I expect that the COVID-19 crisis would be seen as an event which was totally unexpected, unforeseeable and uncontrollable, i.e., a force majeure event. Indeed, we have not experienced a pandemic of this magnitude in over 100 years. But I would not expect the pandemic itself would be seen as making it totally impossible or impracticable for a tenant to pay its rent under a lease. Gabe’s tenant may argue that the Executive Order closing its business makes it impossible for it to use the leased premises and, therefore, it should not be required to pay rent for the time that the business was shuttered. But, since numerous cases have held that the economic hardship from an unforeseen and uncontrollable event may not be enough to relieve a party’s performance, Gabe can contend his tenant’s lost revenue from its business closure is simply an economic hardship that does not relieve it of paying rent under the impossibility, frustration or impracticability doctrines. Since the application of these doctrines is a fact-specific analysis, the outcome of Gabe’s predicament is going to depend on a judge’s interpretation of the specific circumstances. Due to this unknown and since we are all hopeful this will all be over in a few weeks, I suggested to Gabe that the amount in dispute will probably not be substantial. He agreed and we are trying to work out a compromise with his tenant, with renewed awareness of the doctrine of force majeure.