Contract signing

The Ugly Truth About COVID-19 and Force Majeure

Experts suggest we have more questions than answers

Force majeure clauses exist to protect both parties of a contract by removing liability if an unforeseen and extraordinary event prevents one party or the other from performing their obligations.

Given the nature of COVID-19 and its impact on commercial real estate, it seems pretty clear the viral outbreak would trigger force majeure, right?

Not so fast.

According to Dallas Business Journal, “Arguments exist on both sides as to whether or not it would qualify under a force majeure clause.”

The article goes on to state, “On one hand, if a force majeure clause does not specify a pandemic under its list of events, there may be a legal case against it qualifying,” but many clauses contain catch-all provisions that “could likely qualify.”

Michelman & Robinson, LLP, however, warns that catch-all provisions are unlikely to cover pandemics.

“Most courts read force majeure clauses narrowly, especially those that use unspecific terminology, catch-all phrasing, or the term ‘act of God.’”

Instead, they say it’s important to review the language in your specific clause to determine whether the coronavirus outbreak qualifies.

“Some force majeure clauses expressly identify ‘illness,’ ‘disease,’ ‘epidemic,’ ‘pandemic,’ or similar terms in the list of triggering acts. In those instances, it is fairly clear that the coronavirus outbreak would activate the force majeure clause and excuse contract performance.”

Another factor to consider is the shelter-in-place laws many local governments have enacted.

As noted in Dallas Business Journal, “Most force majeure clauses do list restrictive governmental laws or regulations.”

In any case, they warn the matter is unlikely to be settled quickly.

“Most lawyers are expecting an avalanche of litigation over this. It’s unlike anything we’ve ever seen before. Every loan, lease and insurance contract is potentially in play. You’ve got a national and an international event here. It’s not like ’08. Yes, that led to a major economic meltdown but not every single relationship was impacted. This is beyond any of that,” Michael Chaiken of the Chaiken Legal Group stated in the article.

Making matters even more complicated, those who unsuccessfully attempt to trigger their force majeure clause may face significant consequences.

According to Michelman & Robinson, LLP, “In certain contracts, falsely invoking the defense of force majeure … can alone constitute a breach of contract leading to more potential problems,” whether requested in good faith or not.

Furthermore, tenants who successfully trigger force majeure are likely still on the hook for rent.

Cooley, LLP, notes, “Most force majeure clauses do not excuse payment obligations. As a result, tenants are generally not relieved from paying rent even if a state-ordered shutdown qualifies as a force majeure event.”

But force majeure may not be the only avenue through which COVID-19 can eliminate contractual obligations.

Michelman & Robinson, LLP, suggests frustration of purpose may be an option.

“Parties to an agreement might be able to assert the defense of ‘frustration of purpose’ and essentially argue that the stated purpose of the contract is frustrated by a governmental prohibition in response to the virus. The case law, at least in some jurisdictions, includes solid precedent as it concerns frustration of purpose based on a government order.”

They also list impossibility of performance as an option.

“Impossibility of performance is another potential defense to contract enforcement, though not a terribly effective one. This doctrine is construed quite narrowly and usually applied only where performance is objectively impossible, such as where a ‘thing’ necessary for performance has been destroyed. In theory, a party to a commercial lease could argue that it was prevented from performing due to a shelter in place, quarantine, or an isolation ordinance decreed by executive order, but to the extent commercial buildings remain open to provide minimum basic operations and essential business, it is not likely ‘impossible’ for a tenant or a landlord to perform under their commercial lease. This is especially true as it relates to the payment of rent.”