2020 has become an annus horribilis for contract enforcement. The pandemic. Economic contraction. Kids running into your Zoom meeting. It’s enough to make a lawyer break out her French dictionary and get to the root of force majeure. Fortunately, the courts are shedding some light, albeit slowly, on the contractual complications at hand. In this first installment in a series of articles, we take a look at the development of force majeure law in the age of Covid 19.
Contract Doctrines – The Basics
While parties generally are required to perform as promised under their contracts, the doctrines of “impossibility” and “frustration of purpose” provide a common law counterweight. The idea is to mitigate the harsh effects that would arise from strict enforcement if a party is unable to perform or if they can technically perform but outside forces make it such that the value of the contract has essentially been eliminated. And when a contract involves the sale of goods, courts will assess whether performance is impracticable.
Unlike impossibility and frustration of purpose, the doctrine of “force majeure” is not a rule of contract law, but a name given to a contract term under which one or both parties may be excused from performance due to extreme circumstances, such as “acts of god” including inclement weather, wars, public disorder, strikes, etc. Different states may interpret these doctrines, and force majeure clauses, in different ways.
Litigators eagerly await a bountiful harvest of decisions interpreting force majeure provisions and related common law doctrines in the context of Covid 19. One such decision was handed down by the bankruptcy court in the Northern District of Illinois:
The Hirtz Restaurant Group Opinion
In In re Hirtz Restaurant Group, the Court addressed whether a force majeure clause in a lease excused the debtor (a restaurant group) from paying rent after it filed for bankruptcy protection. In re Hirtz Restaurant Group, No. 20 B 05012, 2020 WL 2924523, at *2 (Bankr. N.D. Ill. June 3, 2020). The debtor argued that the state’s executive shelter-in-place order, which forbade in-person dining at restaurants, triggered the force majeure clause in the contract. Id. The court held the clause “unambiguously applies, at least in part, to the rental payments” that were due after the shelter-in-place order, because the force majeure clause covered hindrance of performance due to “laws, governmental action or inaction, [and] orders of government.” Id. Thus, the court held that the restaurant was responsible for rental payments covering only the portion of the space that it could have used for take-out dining, which was permitted (and encouraged) by the order. Id. at *3. Among other issues, the court rejected the landlord’s argument that the debtor was unable to perform under the contract due to a “lack of money,” which, the landlord argued, would not have triggered the force majeure clause; rather, the court explained, it was the executive order that triggered the provision and caused the debtor’s inability to make money and thus to pay the rent. Id.
Steps to Take Now
Regardless of whether you are expecting litigation, there are certain steps to take now:
1. Review your agreements. The economic fallout of Covid 19 is likely long-term, so it makes sense to review any agreements that might be affected, even if there is not an immediate cause for concern. Consider also what State’s law applies to your contract, as an understanding of applicable law is key to evaluating and mitigating risk.
2. Consider whether to negotiate now. To the extent that there is ambiguity in your contracts, or the law is unclear on the application, think creatively about what you might want to do to maintain a mutually beneficial relationship with a counterparty to a contract.
3. Draft new agreements with these issues in mind. Consider including choice-of-law and choice-of-venue clauses in agreements going forward, as well as appropriate force majeure language.
For more information regarding strategy involving litigation or negotiations, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Ellen London.
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