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Law360 (June 12, 2020, 5:15 PM EDT) --
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| Robert Travisano |
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| Robert Lufrano |
The predictable and settling thing about the law is that despite what seemingly novel issues arise, lawyers and litigants can turn to precedent to frame their approach to the here and now.
While none of the current circumstances has ever been experienced before (or at least not in recent memory or to this degree), similar cataclysmic disruptions from the past may be prologue and provide needed guidance for how we handle present-day legal issues.
In the business dispute context, for example, consider the application of the force majeure clause. Such clauses can excuse performance of contractual obligations due to some event "or effect that can be neither anticipated nor controlled."[1]
But how will such clauses be interpreted in the context of nonperformance occasioned by the pandemic and its offshoot issues?
In the current environment contractual nonperformance may result from health-related causes, government reaction to those health-related issues, the economic downturn occasioned by the two or a hybrid of all three.
We can look to the application of the force majeure concept to the 9/11 terrorist attacks and the 2008 Great Recession to gauge how these principles might be applied to COVID-19-related nonperformance.
9/11 Terrorist Attacks
The tragic events of Sept. 11, 2001, caught America flat-footed. One court considered them to be "an extreme, unforeseeable occurrence which is of the magnitude to trigger a force majeure clause."[2]
Despite such a characterization, the very same court refused to excuse performance pursuant to a force majeure clause because "when an act of terrorism affects the American populace [it] would render contracts meaningless in the present age, where terrorism could conceivably threaten our nation for the foreseeable future."[3]
OWBR LLC v. Clear Channel Communications Inc. involved a contract between a music industry conference producer and OWBR, a resort hotel in Hawaii doing business as the Outrigger.
The conference was scheduled to take place Feb. 13-17, 2002, and the Outrigger agreed to hold 2,700 rooms for conference participants. The contract contained a force majeure clause, which stated:
The events of 9/11 intervened. On Jan. 16, 2002, less than a month before the start of the conference, the defendants advised the Outrigger that they were canceling the event because "[t]he events of September 11th coupled with the fragile condition of the U.S. and international consumer economies have resulted in the withdrawal of … many of our sponsors and participants."[5]The parties' performance under this Agreement is subject to acts of God, war, government regulation, terrorism, disaster, strikes (except those involving the Hotel's employees or agents), civil disorder, curtailment of transportation facilities, or any other emergency beyond the parties' control, making it inadvisable, illegal, or impossible to perform their obligations under this Agreement. Either party may cancel this Agreement for any one or more of such reasons upon written notice to the other.[4]
On March 4, 2002, the plaintiff filed a breach of contract action in the U.S. District Court for the District of Hawaii seeking, among other things, $625,912.65 in liquidated damages.[6]
The defendants argued that their performance was excused by the force majeure clause because it was inadvisable due to the events of Sept. 11, other acts of terrorism and the resulting fallout.[7] In essence, since the events of 9/11 "severely disrupted travel, decimated the tourism industry, and created a pervasive sense of fear that gripped the country," holding the event was "inadvisable".[8]
The plaintiff countered that there was nothing inadvisable about holding the event five months after 9/11.[9] The plaintiff also averred that the true reason the defendants canceled the event was the economic downturn, which was too attenuated from the actual events of 9/11 to excuse performance under the force majeure clause.[10]
In resolving this dispute, the court set out to determine the "plain, ordinary meaning accepted in common speech" of "inadvisable," without divorcing that term from the rest of the clause at issue — which enumerated the series of events that could excuse performance.[11]
The court was persuaded by Section 261 of the Restatement of Contracts, which states "mere market shifts or financial inability do not usually effect discharge" of contractual performance.[12] Similarly, it found persuasive case law refusing to excuse performance under force majeure clauses based on economic hardship.[13]
Although the court recognized that it may have been unwise or even inadvisable to hold the event, "[a] force majeure clause does not excuse performance for economic inadvisability, even when the economic conditions are the product of a force majeure event."[14]
Moreover, even if economics were not a significant factor leading to nonperformance, the court still could not excuse performance scheduled to take place five months after 9/11. To do so, the court held, would "render contracts meaningless in the current age," where terrorism threatened the country for the foreseeable future.[15]
The defendants would have stood a better chance to prevail on their inadvisability argument, according to the court, had the event been scheduled during the "weeks immediately following September 11."[16] In contrast, "five months following September 11, when there was no specific terrorist threat to air travel to Maui or to Maui itself, [the defendants could not] escape performance under the Agreement."[17]
One World Trade Center LLC v. Cantor Fitzgerald Securities[18] also dealt with the application of a force majeure clause in the context the 9/11 tragedy. This time, the court found the applicable clause excused performance.
The plaintiff was the landlord of one of the World Trade Center towers and the defendants were lessees of office space in the building.[19] In the lawsuit, the plaintiff sought to recover rent for the period from Aug. 1, 2001, to Sept. 10, 2001.[20]
The defendants counterclaimed seeking rescission of the lease and recovery of purported front-loaded rent payments, which they claimed were for future benefits that the plaintiff could not convey to the defendants as a result of the 9/11 attacks.[21]
The plaintiff moved to dismiss the counterclaims based on the lease's force majeure clause which stated, in relevant part, "[t]he [landlord] shall not be liable for any failure, delay or interruption in performing its obligations hereunder due to causes or conditions beyond the control of the [landlord]."[22]
The lease defined such causes and conditions to include "acts of God ... war ... acts of third parties for which the [landlord] is not responsible ... or any other condition or circumstances, whether similar to or different from the foregoing."[23]
The plaintiffs argued that the counterclaims seeking recoupment of the increased rent allegedly paid in contemplation of future benefits were barred by the force majeure clause.[24
In finding for the plaintiff, the court characterized the counterclaims as essentially seeking a rent abatement that could not be provided because the building was destroyed.[25]
It further noted that the circumstances brought about by the 9/11 attacks expressly excused the performance of the plaintiff. Moreover, the defendants had "bargained away their right to hold the lessor liable for nonperformance in the face of the tragic, unanticipated events which destroyed the [b]uilding."[26]
The result gave effect to the general rule that only if the force majeure clause includes the event that actually prevents a party's performance will it be excused.[27]
The Great Recession
Lasting from December 2007 to June 2009, the Great Recession was the longest economic downturn in our nation's history since World War II.[28] Unemployment hit 10% and gross domestic product dropped over 4% from its peak.[29]
In Route 6 Outparcels LLC v. Ruby Tuesday Inc.,[30] Ruby Tuesday sought to utilize this event to avoid an obligation in a ground lease requiring it to open a branch of its restaurant chain in Pennsylvania. Pursuant to the lease, Ruby Tuesday had agreed to construct and open a restaurant on the plaintiff's real property by March 2009.[31] The Great Recession intervened and Ruby Tuesday did not open the restaurant.[32]
The ground lease contained a force majeure clause which stated:
Ruby Tuesday argued that the global economic downturn that took hold in early 2008 prevented its performance under the ground lease and, consequently, was excused from performing based on the agreement's force majeure clause.[34]Except for any payments due [plaintiff] in accordance with this [l]ease, [plaintiff] and/or [defendant] shall be excused for the period of any delay and shall not be deemed in default with respect to the performance of any of the terms, covenants, and conditions of this [l]ease when prevented from so doing by cause or causes beyond the [plaintiff's] and/or [defendant's] control, which shall include, without limitation, all labor disputes, governmental regulations or controls, fire or other casualty, inability to obtain any material, services, acts of God, or any other cause, whether similar or dissimilar to the foregoing, not within the control of the [plaintiff] and/or [defendant].[33]
In sum, the economic downturn caused a "drastic decline of its stock price, forcing [it] to reclassify over $500 million of its long-term debt and to determine that complying with the lease provisions requiring construction of a new restaurant 'would divert needed funds away from meeting debt obligations and leverage thresholds under its loan covenants.'"[35]
The New York Appellate Division affirmed the trial court's determination that, as a matter of law, absent some intervening act of God or other enumerated factor enumerated in the force majeure clause, the economic downturn that lead Ruby Tuesday to not open the restaurant branch could not excuse its performance.[36]
Moreover, even though the clause at issue may have been exceedingly broad, the parties had nonetheless agreed to limit the impact of force majeure to circumstances beyond the control of the nonperforming party — and economic recessions were not the type of event falling within the clause's purview.[37]
The court also recognized that economic factors often are an inherent part of business transactions between sophisticated parties and therefore concluded that performance should not be excused by the economic downturn "unless such a ground is specifically outlined in the contract."[38]
Force Majeure and the COVID-19 Pandemic
The pandemic, like so many past crises, seems to have blindsided the world. The rampant spread of the novel COVID-19 coronavirus has led to vast fatalities and hospitalizations. In order to stem the advance of this pandemic, the federal government published nationwide social distancing guidelines.[39]
The governors of many states, including New Jersey and New York, issued executive orders declaring public health emergencies requiring the closure of schools and nonessential businesses, and mandating that citizens other than essential personnel remain at home.[40] Invariably, the virus and its repercussions have or will hinder the ability to perform certain legal obligations.
The lessons from prior crises can help navigate these current circumstances. From OWBR, it is clear that timing is important. The defendants in that matter sought to excuse performance of an event that was scheduled five months after 9/11. There, the court refused to excuse performance where the obligation was set to occur so long after the triggering crisis.
Had the event operators been faced with canceling mere weeks following 9/11, the court by its own admission would have had a tougher time finding as it did. OWBR counsels that defenses to nonperformance may have a shelf life.
Some current state and local government orders addressing the novel coronavirus which, for example, limit gatherings to a certain maximum number of participants, may inhibit performance of legal obligations to some degree or another.
Other factors complicating parties' ability to perform also may include general social distancing guidelines, or something much more basic, like the simple fear of contracting the virus. Without question, these have or will lead to the cancellation of events, shows, exhibitions or legal obligations generally.
Where possible, affected parties should assert the force majeure defense in a timely manner and in proximity to the events of the day — such as during the pendency of the aforementioned executive orders — rather than long after those orders have lapsed.
A party seeking to have its performance excused due to pandemic-related issues, would be best served to act before emotions related to such orders have lapsed and related anxiety has subsided.
Indeed, it could prove more difficult to argue, for example, that an event should be canceled without recourse a year after an order has been terminated or a suitable vaccine has been approved and widely circulated. As with all legal disputes, it is important to strike while the iron is hot.
From One World Trade Center, another message is clear: words matter. In that case, the court found that the landlord was not liable because the force majeure clause forgave "any failure, delay or interruption" brought about by acts of third parties outside of its control, i.e. the 9/11 attacks.
So, for example, if a force majeure clause contains wording that excuses performance based upon governmental regulations or orders, it is conceivable that if a party cannot perform due to one of the aforementioned executive orders, that performance may be excused. In contrast, if a clause omits such specific wording and instead references general or unqualified acts beyond one's control, the path may be more difficult.
Likewise, in Ruby Tuesday, while acknowledging that adverse economic forces were at play, the court held that such risks were not covered by the force majeure clause at issue. When nonperformance is occasioned by an event that is not specifically covered by the operative force majeure clause, the party claiming that defense faces an uphill battle.
Indeed, the biggest takeaways from the cases dealing with past crises are that courts construe force majeure clauses strictly and are loathe to permit the economy alone to excuse performance.
When it comes to sophisticated commercial parties in particular, performance likely will not be excused if it is based solely upon the economy unless the clause at issue explicitly says so. Therefore, advancing such a defense to performance runs the risk encountering significant hurdles.
Robert M. Travisano is a member and Robert Lufrano is an associate at Epstein Becker & Green PC.
Disclosure: Travisano represented Ruby Tuesday in the Route 6 Outparcels v. Ruby Tuesday case discussed here.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] "Force majeure is, 'An event or effect that can be neither anticipated nor controlled. The term includes both acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes, and wars).' A force majeure clause is, 'A contractual provision allocating the risk if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled.'" Corestar Intern. Pte. Ltd. v. LPB Communications, Inc.
, 513 F. Supp. 2d 107, 120 n.8 (D.N.J. 2007) (citing Black's Law Dictionary (8th ed. 2004)).[2] See OWBR LLC v. Clear Channel Communications, Inc. et al
., 266 F.Supp.2d 1214, 1224 (D. Haw. 2003).[3] Id.
[4] Id. at 1216.
[5] Id.
[6] Id.
[7] Id. at 1217.
[8] Id. at 1221.
[9] Id.
[10] Id.
[11] Id.
[12] Id. at 1222.
[13] Id. at 1223.
[14] Id.
[15] Id. at 1224.
[16] Id.
[17] Id.
[18] 789 N.Y.S.2d 652 (Sup. Ct. N.Y. 2004).
[19] Id. at 653.
[20] Id.
[21] Id. at 654. Defendants contended that as part of a supplementary lease, they had agreed to pay an increased, front-loaded rent and restrictions on termination rights in consideration for future benefits including a fixed rental rate, signage, and dedicated lobby screening stations. Id.
[22] Id.
[23] Id.
[24] Id.
[25] Id.
[26] Id. at 654-55.
[27] Id. at 655.
[28] See Robert Rich, The Great Recession (Nov. 22, 2013) (available at https://www.federalreservehistory.org/essays/great_recession_of_200709).
[29] Id.
[30] 88 A.D.3d 1224 (N.Y. App. Div. 3d Dept. 2011).
[31] Id.
[32] Id.
[33] Id. at 1225.
[34] Id.
[35] Id.
[36] Id.
[37] Id. at 1225-26.
[38] Id.
[39] See The President's Coronavirus Guidelines for America, 30 Days to Slow the Spread (Mar. 16, 2020) (available at https://www.whitehouse.gov/wp-content/uploads/2020/03/03.16.20_coronavirus-guidance_8.5x11_315PM.pdf).
[40] See, e.g., Gov. Philip D. Murphy, Executive Order No. 107 (Mar. 21, 2020) (available at https://nj.gov/infobank/eo/056murphy/pdf/EO-107.pdf); Gov. Andrew M. Cuomo, Executive Order No. 202.4 (Mar. 17, 2020) (available at https://www.governor.ny.gov/news/no-2024-continuing-temporary-suspension-and-modification-laws-relating-disaster-emergency).
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