In the wake of Covid-19, litigants have increasingly sought to excuse contractual performance by invoking force majeure clauses or the doctrine of impossibility. Yet despite the numerous (and creative) Covid-19-related arguments propounded by litigants in recent months, this emerging body of law remains largely undeveloped.
There are only a handful of reported decisions on these matters, and the substance of these rulings echoes the principles that were applied in the pre-Covid era: Force majeure clauses are strictly and narrowly construed, and the evidentiary showing necessary for a successful impossibility argument remains a high bar.
This article analyzes two recent federal district court holdings from May and June 2020 and offers practical tips for contract drafting to avoid (or succeed in) litigation in a post-pandemic world.
Restaurant Owner Sued Over Delinquent Rent
The first case—In re Hitz Rest. Grp. (Bankr. N.D. Ill. June 2, 2020)—involved a restaurant owner who was sued for delinquent rent payments. The owner mounted a partially successful force majeure argument based on:
- Illinois’ stay-at-home order, and
- language in the lease’s force majeure clause that explicitly mentioned laws and other government action that could frustrate performance.
But the bankruptcy court was careful to focus on both the precise language and scope of the stay-at-home order and the force majeure clause in determining the extent of performance excused. The Illinois stay-at-home order provided:
“All businesses in the State of Illinois that offer food or beverages … must suspend service for and may not permit on-premises consumption. Such businesses are permitted to serve food and beverages so that they may be consumed off-premises, … through means such as in-house delivery, third-party delivery, drive-through, and curbside pickup.”
And the lease’s force majeure clause provided that “Landlord and Tenant shall each be excused from performing [if] laws, governmental action or inaction, orders of government [preclude performance].”
Taken together, the court determined that the stay-at-home order qualified as an “order of government” or “law” that precluded performance, albeit only in part: It still allowed restaurants to offer curbside pickup and takeout (which this restaurant did not offer), and so the court held that the owner was partially responsible for rent payments in proportion to the business he could have generated through takeout.
Gym Owners Seek to Excuse Rent Payments
The second case—Lantino v. Clay LLC (S.D.N.Y. May 8, 2020)—involved gym owners who sought to excuse rent payments under the impossibility doctrine and by virtue of economic hardship caused by Covid-19.
The court flatly rejected this argument because:
- impossibility in New York requires a showing that performance is “objectively impossible,” and
- while the gym owners provided affidavit testimony that their business (and personal finances) were hit hard by Covid-19, they were not destitute or otherwise completely unable to pay.
The court was particularly critical of the fact that the defendants’ affidavits did not discuss or include documents regarding their personal finances, the assets of the business, or other trusts/funds to which they might have access.
There are several takeaways from these cases. Principally, drafters of force majeure clauses should understand that stay-at-home orders may be the new normal and can serve as a basis for excusing performance where a force majeure clause mentions laws or government action. Further, for those representing clients who seek to excuse performance on this basis, it is important to recognize that these orders are not broad, catchall excuses.
Thus, careful attention should be paid to the language and scope of the government order, the types of industries affected, and any subsequent modifications to the order.
Careful attention should also be paid to the viability of an “economic hardship” argument. The Lantino court did not reject the argument in theory, but it required a strong evidentiary showing of impossibility (i.e., an objective inability to pay the amounts due under the contract). Affidavits that businesses have suffered substantial losses are likely insufficient; instead, a complete picture of the party’s personal and business records is needed to substantiate an impossibility claim based on economic hardship. And lawyers should manage clients’ expectations accordingly.
Apart from these cases, a key contractual insight to adopt in post-pandemic drafting is thinking beyond “the boilerplate.” Considerations include:
- Choice of law. The doctrine of impossibility and judicial treatment of force majeure clauses vary from state to state. New York, for example, sets a high bar (i.e., objective impossibility) and requires not only that the force majeure clause includes a specific trigger event but also that the event is unforeseeable. California, on the other hand, excuses performance that is impracticable because it will require unreasonable expense to perform. While these courts may look at the same set of facts in rendering a decision, the jurisdiction-specific analysis will likely lead to different outcomes.
- Qualifying events. It is unclear whether adding a generalized “pandemic” provision for a force majeure clause will suffice. Much as courts have construed “acts of god” narrowly, it is likely that courts will follow suit in construing the term “pandemic.” Thus, explicit qualifiers should be used that detail the circumstances under which performance may be excused (e.g., “a pandemic or widespread disease that constitutes a national or state emergency”).
- Force majeure remedies. Contracting parties should consider what remedies a force majeure clause would provide (e.g., does the clause allow for complete termination of the contract? Does the clause delay performance for a certain duration?). To that end, does the force majeure event need to affect performance absolutely? Does a party need to make reasonable efforts to mitigate nonperformance or delayed performance? These are questions that were frequently overlooked or glossed over in a pre-Covid-19 world, but now should be on the table and duly considered in negotiations. In a post-Covid-19 world, courts will assume litigants had their eyes open and were alert to these issues at the time of drafting.
- Exit rights. Given the difficulties in mounting successful force majeure and impossibility arguments, parties may consider adding more flexible exit rights to contracts that would permit termination or delay in the event of severe economic downturns; supply chain, labor, or transportation disruptions; quarantines; and the like.
Reprinted with permission from the July 2, 2020, issue of Bloomberg Law. © 2020 The Bureau of National Affairs, Inc. All Rights Reserved. 800.372.1033. For further use, please visit: http://bna.com/copyright-permission-request/.
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