In March of 2020 at the beginning of the COVID-19 pandemic, force majeure clauses became a hot topic of conversation.[1] Contracting parties suddenly had an interest in dusting off the boilerplate provisions of their pre-COVID contracts to determine whether, and to what extent, their force majeure clauses could excuse performance. In the months since March 2020, courts in several jurisdictions heard cases and interpreted force majeure clauses without much guidance from prior case law. While case law in the area is still evolving, a few takeaways have emerged.
As a reminder, courts generally take a three-step approach to interpreting force majeure clauses. First, courts will look at the specific language of a force majeure clause and how the clause defines events constituting force majeure. Second, a court will determine whether the defined event actually caused the delay or nonperformance of the contract. While COVID-19 is a great excuse for avoiding the dentist or dinner with the in-laws, that justification likely will not excuse your performance under a contract, unless you can demonstrate a causal connection between the pandemic and your nonperformance. Finally, courts will look at what relief your force majeure clause provides. Some clauses may allow you to delay performance until the defined event ends; other clauses might allow a party to cancel the contract altogether.
Notwithstanding the far-reaching effects of the pandemic, many courts interpret force majeure clauses strictly. For example, a Hawaiian court denied a refund of a significant deposit paid by a party planning a large-scale in-person event that was ultimately canceled because the force majeure provision of the applicable contract did not explicitly provide for a refund of deposits made.[2] The Plaintiff in the case also failed to properly allege the elements for a breach of contract.[3]
The tendency to strictly interpret force majeure clauses often arises with the issue of causation. Parties often lose on the causation factor by citing economic hardship from COVID-19 as the reason for their nonperformance.[4] Although COVID-19 has unquestionably caused global economic hardship, such hardship is generally not recognized as a force majeure event. Instead, the litigants who were successful in invoking force majeure protection were those who were able to connect the dots between the pandemic and their inability to perform.
Despite the strict interpretations employed by most courts, some courts have been willing to fashion relief that may not entirely line up with a written contract. In In re Hitz Rest. Grp.[5], an Illinois Bankruptcy court interpreted a force majeure clause in a lease to partially excuse performance, reducing a restaurant owner’s obligation to pay rent in proportion to revenue lost due to an executive order shutting down in-person dining but encouraging carry-out, curbside and delivery service.[6]
As these cases illustrate, interpretation of force majeure clauses remains somewhat unpredictable. One key takeaway is, that prior to the COVID-19 pandemic, force majeure clauses were often sloppily written and failed to allocate risk in a manner acceptable to the contracting parties. Where these clauses were often boilerplate and repurposed from agreement to agreement, contracting parties spent little to no time writing or negotiating them. Businesses and customers alike have realized the effects of a poorly drafted force majeure clause with countless examples of the loss of significant sums of money. With the realities of the last two years upon us, parties entering into contracts should be sure to review and update their force majeure clauses to ensure their long-term viability.
As the COVID-19 pandemic continues to evolve, the attorneys at Parsons Behle & Latimer can help you assess your risks. To discuss this or other related matters, contact Hannah Ector at 801-536-6785 or send an email to HEctor@parsonsbehle.com.
[1] See, e.g. Reber, Lauren, Does Covid-19 qualify as an event of Force Majeure under your lease?, ParsonsBehle.com (April 3, 2020), https://parsonsbehle.com/insights/does-covid-19-qualify-as-an-event-of-force-majeure-under-your-lease; Leeman, Alex, Contracts and COVID-19: What is Force Majeure Anyway?, ParsonsBehle.com (March 17, 2020), https://parsonsbehle.com/insights/contracts-and-covid-19-what-is-force-majeure-anyway.
[2] NetOne, Inc. v. Panache Destination Mgmt., Inc., No. 20-CV-00150-DKW-WRP, 2020 WL 3037072, at *5 (D. Haw. June 5, 2020). Lantino v. Clay LLC, No. 1:18-CV-12247 (SDA), 2020 WL 2239957, at *3 (S.D.N.Y. May 8, 2020) (refusing to recognize economic hardship caused by COVID-19 as an excuse for performance under a settlement agreement).
[3] Id. at *4.
[4] See, e.g., Palm Springs Mile Assocs., Ltd. v. Kirkland's Stores, Inc., No. 20-21724-CIV, 2020 WL 5411353, at *2 (S.D. Fla. Sept. 9, 2020); Lantino v. Clay LLC, No. 1:18-CV-12247 (SDA), 2020 WL 2239957, at *3 (S.D.N.Y. May 8, 2020) (refusing to recognize economic hardship caused by COVID-19 as an excuse for performance under a settlement agreement).
[5] 616 B.R. 374 (Bankr. N.D. Ill. 2020).
[6] Id. at 379.
