Force Majeure Contract Clauses and COVID-19
A “force majeure” is a contract clause that excuses the performance required of a party by the contract because unforeseen circumstances outside the party’s control have rendered that performance impracticable or impossible. A “force majeure” is sometimes also called an “Act of God.”
Over the past year, in light of the pandemic and economic downturn, many business owners are faced with either their own or another party’s inability to perform under a contract.
As a result, the question of whether the COVID-19 pandemic constitutes a “force majeure” event that can trigger a force majeure clause has been tested in the courts. In addition, practitioners have paid closer attention to these clauses when drafting and negotiating contracts.
What Is a Force Majeure Clause?
Force majeure clauses have routinely been included in contracts to protect against “Acts of God” such as earthquakes, hurricanes or other natural disasters. Force majeure clauses may also identify other unforeseen events that will excuse performance such as war, labor strikes or terrorist attacks.
Some force majeure clauses specifically list public health disasters such as disease or pandemics as force majeure events, but many do not.
The force majeure clause may also include a catch-all provision for other unforeseeable events beyond a party’s control.
“Force majeure” clauses were often boiler plate, and routinely inserted in contracts without much consideration to potential deviations.
Is the Coronavirus Pandemic a Force Majeure Event?
Whether the pandemic is deemed to excuse performance under a contract will vary from state to state. In general, however, the pandemic (i) must fit the specific or general description of a force majeure event under the contract; (ii) the fact of the pandemic must have been unforeseen and made it impracticable or impossible for a party to perform under the contract; and (iii) the pandemic must have been the actual cause of non-performance. Less profit or income in and of itself does not generally excuse performance.
If a force majeure event is simply listed in the contract as an “Act of God”, without specific reference to a pandemic, whether performance is excused will depend on whether the pandemic is deemed an Act of God. The Michigan Supreme Court, as an example, has defined an Act of God for force majeure purposes as:
Those events and accidents which proceed from natural causes and cannot be anticipated or avoided and provided against, such as unprecedented storms, or freshets, lightning, earthquakes, etc.
Golden & Boter Transfer Co v Brown & Sehler Co, 209 Mich. 503, 510; 177 NW 202 (1920).
In other words, an Act of God must be entirely natural in origin. It cannot be merely economic or legal in origin, generally.
However, if the force majeure language is broader than Acts of God, the exact wording of the contractual provision in dispute will determine whether the pandemic excuses performance.
Force Majeure Clauses in the Federal Bankruptcy Context
Several recent force majeure disputes as a result of the COVID-19 pandemic have been argued in the context of Federal bankruptcy law.
When interpreting contract language, a Federal bankruptcy judge will defer to the laws of the state in which the bankruptcy is filed for guidance.
The decisions—so far—of bankruptcy courts around the United States regarding COVID-19 and force majeure clauses, have interpreted the clauses at issue very literally—and very narrowly.
In In re CEC Entm’t, Inc., 2020 Bankr. LEXIS 3493, 2020 WL 7356380 (Bankr. S.D. Tex. Dec. 14, 2020), the Chuck E. Cheese restaurant chain, operating rented restaurant locations in multiple states, argued that COVID-19 constituted a force majeure-triggering event as regards all of its rental leases. The court ultimately held that Chuck E. Cheese was not entitled to rent abatement under the force majeure provisions in its real estate leases.
Analyzing the laws concerning force majeure provisions of approximately four different states, the Bankruptcy Court ruled that the restaurant chain was not entitled to rent abatement because the specific language of the force majeure clauses excluded applicability based on simple inability to pay rent for lack of money.
In a Florida Bankruptcy Case, the Court found that the force majeure clause in a commercial rental lease was properly triggered by the State Governor’s COVID shut-down order as the force majeure clause did specifically include “government actions” as a triggering event, alongside “Acts of God.” See In re Cinemex USA Real Estate Holdings, Inc, 2021 Bankr. LEXIS 200 (Bankr. S.D. Fla. Jan. 27, 2021). The court excused the payment of rent under a lease for a Florida theater during the time period that the theater was barred entirely from opening under Florida’s COVID shutdown orders. However, the court found that rent was owed once Florida’s shutdown order was lifted, even if Cinemax could only reopen at partial capacity.
The Bankruptcy Court came to a similar conclusion in In re Hitz Rest. Grp., 616 B.R. 374 (Bankr. N.D. Ill. 2020). In Hitz, the court held that an executive order barring restaurant operations on-premises in light of covid-19 is a force majeure event that partially excuses debtor restaurant’s payment under its lease. The court noted that performance was only excused if the pandemic in fact caused the inability to pay rent. In that case, the force majeure clause explicitly included “government orders.”
Force Majeure Clauses and Contract Negotiation
The above cases demonstrate the importance of careful consideration of the language of the force majeure clause when drafting a contract. The drafter should consider the laws of the state in which the contract is drafted, the subject matter of the contract, and the type of contract. For example, considerations might be different for a contract for the sale and purchase of goods as compared to a rental lease agreement.
When drafting force majeure clauses:
- Don’t use “boilerplate” contracts pulled from the internet; and
- Consider that the specific force majeure provision in a specific contract will be the key decision-point when parties disagree as to whether COVID-19 constitutes a force majeure-triggering event that excuses performance.
Force Majeure Clauses and COVID-19: The Bottom Line
The bottom line regarding force majeure clauses in the age of COVID-19 is that, as ever, the devil is in the details.
There is no case law flatly holding that the pandemic’s persistence gives rise to a right to a force majeure exit from contractual obligations or that the pandemic constitutes an Act of God under either Michigan or Federal law. Rather, case law permitting excuse from performance based on force majeure are driven by the language of the contract and the specific facts of the case.
When drafting a new contract post-COVID, or considering whether an existing contract excuses performance, it will be wise to retain counsel to appropriately account for the specific circumstances that the new COVID reality has introduced.