IT TAKES AN ACT OF GOD

Attorneys drafted force majeure clauses into contracts on the off-chance the parties could not fully perform a contract due to reasons specified in the clause. Until recently, force majeure clauses were overlooked and rarely invoked to cancel or suspend the performance of a contract. As with every other aspect of our lives, this changed, and similarly to how the pandemic spread like wildfire, the invocation of force majeure clauses to cancel or suspend the performance of a contract began spreading across the corporate world like wildfire.

Force majeure clauses are designed and drafted to excuse or suspend both parties from their respective performances of a contract under a certain set of limited circumstances. Because contracts are generally drafted to ensure the enforceability of its performance, courts have historically construed force majeure clauses rather narrowly.

Prior to COVID-19, most force majeure clauses did not include epidemics and pandemics in the boilerplate language of a force majeure clause.

An example of a boilerplate force majeure clause pre-COVID would hold that,

Neither party shall be held liable or responsible to the other party nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any term of this Agreement to the extent, and for so long as, such failure or delay is caused by or results from causes beyond the reasonable control of the affected party including but not limited to fire, floods, embargoes, war, acts of war (whether war be declared or not), acts of terrorism, insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances, acts of God or acts, omissions or delays in acting by any governmental authority or the other party.¹

The “catchall” in properly drafted force majeure clauses is the “Act of God” provision.

When the pandemic began to spread like wild fire, we saw that supply chains were being disrupted, people were unable to go into work, and it became unsafe to do things that we wouldn’t have given a second thought to doing less than one year ago; which brings me to the crux of this blog. Is a pandemic an Act of God? And, if so, can a party suspend or cancel the performance of a contract by invoking this provision?

To properly invoke the force majeure clause, it must be drafted in such a way that would allow the clause to be reasonably construed to include pandemics. Many scholars believe that although case law is scant when it comes to interpreting a pandemic as an Act of God, it is reasonable to construe a pandemic as an Act of God, and as such able to excuse the performance of a contract drafted prior to COVID-19.² However, the Act of God language must be included in the force majeure clause to invoke the catchall provision.

Even then, if a contract contains the Act of God language in a force majeure clause, it is not guaranteed that a party can invoke it to cancel or suspend its performance of a contract. The party wishing to cancel or suspend the performance of a contract must also show that despite the Act of God, the party still tried to perform its contractual duties.

Furthermore, to properly cancel or suspend the performance of the contract by invoking the clause, the party invoking it must demonstrate that the Act of God actually impacts its performance of the contract.³ That is to say, a party may not simply invoke an Act of God provision to relieve the party of its contractual duties; the party must shoulder its burden to demonstrate that there is a link between the Act of God and that party’s ability to perform the contract.

For more information, please contact: info@vwattys.com

¹https://www.lawinsider.com/clause/force-majeure

²https://www.stanfordlawreview.org/online/contracts-and-covid-19/

³Beardslee v. Inflection Energy, LLC, 798 F.3d 90, 93 (2d Cir. 2015)

VW Contributor: Leslie E. Mueller
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COVID-19 and Contract Enforcement: Illinois Bankruptcy Court holds that Force Majeure Provisions Excuse some Obligations Under Contract

One of the legal questions that has risen out of the COVID-19 pandemic is what obligations do parties of a contract have when one of the parties is unable to perform under the terms of the contract due to COVID-19?  Many contracts typically include a force majeure provision, or a clause that essentially frees both parties from the liabilities or obligations of the contract when an extraordinary event or circumstance beyond either parties’ control occurs.  Due to the rapid and widespread health and economic impact of COVID-19, such force majeure provisions are becoming a contested legal area as parties grapple with the unforeseen consequences of the pandemic.

On June 3^rd, the United States Bankruptcy Court for the Northern District of Illinois interpreted a force majeure provision in the case of In re Hitz Restaurant Group.  This case is one of the first applications of a force majeure provision due to COVID-19.  The Hitz Restaurant Group filed for bankruptcy protection under Chapter 11 and argued that an Illinois state executive order that restricted dine-in restaurant operations due to COVID-19 excused the Group from being required to pay post-bankruptcy petition rents until their lease is assumed or rejected.  The Group’s landlord argued that the force majeure provision did not apply.

The contested force majeure clause read:

“Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by . . . laws, governmental action or inaction, orders of government . . . Lack of money shall not be grounds for Force Majeure.”

The landlord argued that the force majeure clause should not apply for three primary reasons: (1) the banking and mailing system was still functioning so the debtor could still transmit payment to the landlord, (2) the debtor’s inability to pay was due to a “lack of money” and therefore not grounds for force majeure, and (3) the debtor chose to forgo applying for a loan under the SBA Paycheck Protection Program voluntarily waived its ability to meet rent obligations.

The Bankruptcy Court rejected all three arguments. The Court cited the first argument regarding the functioning mailing system as being unresponsive to the actual reason the debtor could not meet its rent payments.  The second argument regarding the “lack of money” clause was rejected by the Court, again, for not being the debtor’s argument for the enforcement of the provision; it was not “lack of money” that the debtor couldn’t pay the landlord, but the executive order shutting down all “on-premises” dining as the proximate cause of the debtors inability to generate revenue and pay rent.  Finally, the Court rejected the landlord’s third argument as there was no language in the force majeure provision to order or borrow money to counteract governmental action or orders, just that such actions or orders impact the landlord and tenant’s abilities to perform under the lease agreement.

The Court concluded that the debtor was not completely off the hook, however, for the missed payments and could have taken actions to protect the landlord’s interest in the leasehold given that only 75% of the square footage of the restaurant was unusable due to the executive order and the remaining 25% of the kitchen could have been used for take-out.  Thus, the Court required 25% of the post-bankruptcy petition rents.  The full post-bankruptcy petition rent was not owed due to the Court upholding that COVID-19 was cause to enact the force majeure provision of the lease agreement.   This ruling is likely the first in a line of force majeure provision cases in light of COVID-19.

VW Contributor: Ryan Coufal
© 2020 Vandenack Weaver LLC
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