When an unexpected event interrupts business as usual, it is common to question whether or not that event will excuse parties from performing their contractual obligations. Many legal contracts, including real estate leases, attempt to address this issue with a “Force Majeure” clause, which outlines how these unexpected events are handled.
Given the sudden impact of the Covid-19 Pandemic, many commercial real estate professionals are trying to determine if it qualifies as a Force Majeure event. The answer to this question has significant financial consequences for landlords, small businesses, and insurance companies worldwide. In this article we will discuss force majeure in depth, and also review possible relief options.
What is Force Majeure?
Force Majeure is a Latin word meaning superior force. Within the context of a legal contract, a “Force Majeure” clause frees one or both parties from liability or obligation when an extraordinary event, such as war, strike, crime, or “Act of God” prevents one or more parties from fulfilling their obligations under the contract.
If such an event were to occur during the contractual term and a party invokes the Force Majeure clause as justification for their non-performance, there is a legal test to determine if their claim is valid.
Determining Force Majeure
Determining the validity of a Force Majeure claim can be difficult and subject to interpretation. When doing so, there are a series of general questions that a court or arbitrator may consider:
1. Was the event within the contemplation of the parties at the time the contract was made?
Often, the specific language of a Force Majeure clause lists a series of events that may excuse a party from performance under the terms of the contract. This can be seen in the sample clause below:
“Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, acts of war, terrorist acts, inability to obtain services, labor, or materials or reasonable substitutes therefore, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform (collectively, a “Force Majeure”), shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and, therefore, if this Lease specifies a time period for performance of an obligation of either party, that time period shall be extended by the period of any delay in such party’s performance caused by a Force Majeure.”
This is a clause from a commercial lease and, in plain language, it states that the tenant is excused from paying their rent in the case of “…strikes, lockouts, acts of God, etc.” and that they will continue to be excused for as long as the event lasts. So, the first criteria looks to see if the event is specifically described in the lease as a Force Majeure. Otherwise, it may not qualify or may be subject to interpretation under a broad description like “act of God.”
2. Is/was the event beyond the reasonable control of the affected party?
The next question seeks to determine if the event was beyond the control of the affected party. In their white paper on Force Majeure, the law firm DLA Piper states that “the phrase circumstances beyond the control of the person concerned” has not been subject to detailed examination by the courts. Instead, they assume that the phrase is given its everyday meaning.
They go on to state that “the phrase has been judicially held to refer to occurrences where neither the person concerned, nor any person acting on their behalf to do the act or take the step, could prevent.” So, when attempting to invoke the Force Majeure clause, this will be a major consideration.
3. Is/was the Affected Party’s ability to perform its obligations prevented by the event?
When determining the validity of a Force Majeure claim, a court or arbitrator will likely examine whether not the specific event impeded the affected party’s ability to perform under the contract.
For example, if an electronics manufacturer is unable to produce and sell their products as result of a labor strike, and thus can’t pay their rent, a reasonable argument may be made that their ability to perform under the lease was impacted by the event.
But, if the manufacturer failed to place an order with a key supplier and doesn’t have the raw materials to produce their product and tried to claim a Force Majeure, their argument isn’t nearly as strong.
4. Could the event have been reasonably foreseen by both parties?
Any court or arbitrator may study whether the claimed Force Majeure event could have been reasonably foreseen by both parties to the contract.
For example, if a company plans an outdoor music festival, but has to cancel at the last minute due to severe weather, it could be argued that this is an event that could have (and should have) been foreseen by both parties. As such, it may not be considered a Force Majeure event.
On the other hand, if the same concert is canceled due to an earthquake or labor strike, these events may not have been foreseen and may have a stronger argument as a Force Majeure event.
5. Did the affected party take all reasonable precautions to avoid the event or mitigate its consequences?
Finally, a court or arbitrator may look to see if the contracted parties took reasonable precautions to avoid or mitigate the event.
Using the same concert example above, it could be argued that the concert organizer should have taken steps to avoid the bad weather or had a contingency plan in place. If they didn’t, it could disqualify their Force Majeure claim.
If an event or circumstance is indeed declared to be a Force Majeure, there are two options for relief.
Force Majeure Relief Options
Contractual relief from a Force Majeure event typically takes one of two forms:
Temporary suspension of performance requirements under the contract, which lasts for as long as the duration of the event. For example, if there is a strike, the contractual obligations could be suspended for the duration of the strike and resume once it is resolved.
Cancellation of the contract. If the Force Majeure has an uncertain duration or the contract was for a one-time event, like a conference or festival, it could be canceled.
While these are common forms of relief, they may not be the only ones. The exact forms are outlined in the terms of each specific contract and may vary from one to another. As such, the Force Majeure section of a contract should be reviewed in detail.
Does Covid-19 Qualify As a Force Majeure Event?
As usual, the answer to this question will depend on the specific contract in question as well as the surrounding context. The devil is always in the details and contractual terms vary from one agreement to the next. Those questioning whether or not they are bound to certain contracts should: (1) read the terms of the contract to determine if some version of a pandemic is included in the Force Majeure contract language; and (2) consult a qualified real estate attorney for further legal advice.