FORCE MAJEURE IN THE WAKE OF COVID-19

Though it has been roughly one year since federal and local governments first enforced widespread lockdowns in response to the COVID-19 global pandemic, businesses in nearly every industry are still feeling the pandemic’s harmful effects. In many cases, the pandemic’s negative impact has fully prevented companies from continuing normal operations. And, companies locked into contracts face substantial liability for failing to perform contractual obligations. Still, some businesses have found relief where the agreement contained a force majeure clause.

A force majeure clause is a contractual provision that relieves the parties from performing under the contract when certain circumstances make it commercially impracticable, impossible, or illegal to perform. Agreements generally define the circumstances under which a party may invoke the force majeure clause, i.e., force majeure “events.” For example, a force majeure clause may be triggered by acts of God, war, terrorism, government regulation, disaster, or strikes, any one of which make performance impossible. Notably, some courts require that the force majeure event must not only be defined in the force majeure clause, but must also be unforeseeable to the party relying on the clause. See Phibro Energy, Inc. v. Empresa De Polimeros De Sines Sarl, 720 F. Supp. 312, 318 (S.D.N.Y. 1989); see also Watson Laboratories, Inc. v. Rhone-Poulenc Rorer, Inc., 178 F.Supp.2d 1099, 1111 (C.D. Cal. 2001).

On its face, the COVID-19 pandemic, and the litany of government regulations that followed, seem to fit the typical force majeure definition. Still, court decisions vary on whether the pandemic constitutes a force majeure event, thereby relieving a party from performing under a contract. For example, in JN Contemporary Art LLC v. Phillips Auctioneers LLC, the parties entered into an agreement in which the defendant promised to auction two paintings in New York in May 2020. 2020 WL 7405262 at *1 (S.D.N.Y. Dec. 16, 2020). Following the outbreak of the pandemic in New York, the defendant auctioneer terminated the agreement and refused to pay the plaintiff the minimum price guaranteed under the contract. Id. The plaintiff then brought suit to enforce the contract. Id. The court, however, dismissed the plaintiff’s breach of contract claims, explaining that the “COVID-19 pandemic and the attendant government-imposed restrictions on business operations… fall squarely under the ambit of [the contract’s] force majeure clause.” Id. at 7.

By contrast, in In re CEC Entm’t, Inc., the court found that the force majeure clause in the defendant’s commercial lease agreements in North Caroline, Washington, and California did not apply to an inability to pay rent or a failure to perform due to lack of funds. 2020 WL 7356380 at *6-9 (Bankr. S.D. Tex. Dec. 14, 2020). Accordingly, the court denied the defendant’s motion to abate or reduce its rent payments under each of the leases. Id. at *15.

Given the uncertainty surrounding the application of force majeure clauses to the COVID-19 pandemic, litigants seeking to rely on a force majeure clause to avoid liability must understand the language and scope of the clause. Litigants must also be prepared to point to specific government orders that made performance impossible or impracticable. The mere fact that the pandemic reduced the litigant’s profits may not be enough. Finally, litigants should be aware of any jurisdiction-specific requirements for demonstrating a force majeure event. While some jurisdictions may require that the event be unforeseeable, others may not. Understanding jurisdictional requirements is crucial in establishing a successful force majeure defense.

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