How Courts May Handle Real Estate Force Majeure Suits

By Andrew McIntyre
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Law360 (April 21, 2020, 4:42 PM EDT) -- The COVID-19 pandemic is expected to usher in a flood of litigation over force majeure clauses in real estate contracts, and while each case will first examine the circumstances and language of the contract, lawyers say states will also differ in their interpretations.

Force majeure, common in real estate contracts, excuses parties from certain obligations in the wake of so-called act of God or other uncontrollable events, although the clauses generally don't include the word pandemic, which opens the door to interpretation from state courts.

"This is an extraordinary time," said Edward Prokop, a partner at Winston & Strawn LLP. "There is no pandemic precedent."

As far as states go, lawyers say it may be easier for parties to win force majeure protection in states like Florida and California, while the bar in New York court could be higher.

"We're expecting an avalanche [of force majeure cases] later," said Richard Holzheimer, a first-chair trial partner at McGuireWoods LLP.

Here, Law360 looks at the ways courts in New York, Florida and California may differ in their interpretation of force majeure clauses.

New York May Require Proof of Impossibility

New York may be one of the toughest jurisdictions in which to win force majeure protection since the state's courts may require showing that it was impossible for the party to perform the duties in question, according to lawyers.

"In New York, the fact that it was foreseeable will mean that even if it's a force majeure event, the court may not give force majeure," said José Ferrer, a trial lawyer and partner at Bilzin Sumberg Baena Price & Axelrod LLP. "Even if COVID-19 qualifies as an epidemic ... [New York courts may look at whether] it's the virus itself that prevented the party from performing under the contract."

What may happen is that the same disputes just across the river in New Jersey may play out differently in that state, since New Jersey courts often take a more broad interpretation of acts of God, said Marc Gurell, a partner at Seyfarth Shaw LLP.

"New York courts have historically interpreted force majeure clauses narrowly and have consistently held that a party will only be excused from performance if the event in question was specifically addressed within the contract and the event actually prevents the party's performance," Gurell said.

Florida, Delaware and California, on the other hand, may not be as strict as New York on the impossibility question, Ferrer said.

In those three states, "It's OK that it's not absolutely impossible to perform the contract as a result of the force majeure event. The fact that it happened and it's impracticable to perform, that's enough to invoke the force majeure," Ferrer said. "In states like New York, it has to be impossible."

However, some businesses in New York have been shut down by government order, and in such instances, those orders would likely satisfy the impossibility test, experts say.

California May Be More Sympathetic to the Act of God Argument

Force majeure clauses often include the act of God phrasing, and while New York may require more than just proving that the pandemic is one, California courts may be more likely to sympathize with the act of God argument.

"California lawyers are going to be trying to make an argument that the coronavirus is not an act of God," said Penny Pittman Cobey, counsel at BakerHostetler. "My view is that California law is not going to get stuck on that … narrow point. I think that's a losing argument. It was completely unavoidable."

In the case of California, the state's civil code may guide courts on the question. Cobey mentioned California Civil Code 3526, which states that "no man is responsible for that which no man can control," as an example, and California's Civil Code 1511 has similar language, Cobey said.

"States do differ. California takes a relatively liberal approach to the question of force majeure," Cobey said. "That is actually backed up by various provisions in the California Civil Code."

Tad O'Connor, a first-chair trial partner at Kasowitz Benson Torres LLP, said he expects to see force majeure suits across the country in the next 30 to 60 days, and that the most populous state will certainly see its share.

"There is a view that the interpretation of California courts to the provision is slightly less strict, slightly more forgiving, than the courts in New York and Delaware," O'Connor said, expressing a general pre-COVID view and noting that we're now in uncharted territory. "In order to succeed in your force majeure case, do you need to demonstrate impossibility, or is there something less than impossibility that may get you there?"

California courts "may interpret force majeure clauses not to require demonstrating an impossibility of performance," O'Connor added.

Florida May Agree That This Was Unforeseeable

Florida courts are well acquainted with force majeure since it's routinely dealt with in the context of hurricanes, but the state, like others, will have to address the question of whether and how the clauses apply to a pandemic.

Lawyers say it may be easier to win force majeure protection in Florida than in other states, since in the past the state has granted such protection even for foreseeable events like hurricanes. Since courts have been sympathetic during foreseeable events, they are likely to also be sympathetic during an unforeseeable event like the coronavirus pandemic, Ferrer said.

"A hurricane barreling through is foreseeable. We get them every year. In Florida, that wouldn't necessarily pose a problem with the force majeure clause. The courts would [generally] enforce it," Ferrer said.

Of course, the specific wording of the force majeure clause and circumstances will still be key, but Ferrer said there's "a big distinction" between the approaches in Florida versus New York courts.

And Ferrer said that to the extent suits are filed in federal court, federal courts in Florida and other states are likely to take similar approaches to those of state courts.

"I expect there to be a flood of new cases invoking all of these concepts. There's going to be an unprecedented body of case law that we're going to have to ... interpret," Ferrer said. "Some people are going to be forum shopping. These cases are just as likely to end up in federal court."

And until cases start to get filed en masse, real estate parties and lawyers remain in a "holding pattern," O'Connor said.

"Force majeure is obviously being discussed between lawyers and clients on both sides of the issue. It's going to be a wait and see, to see how courts deal with this crisis," O'Connor said. "The jury is out on how these provisions are going to be interpreted."

--Editing by Alanna Weissman.

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