Force Majeure Clauses in Leases and Contracts
Over the next few months – or even years – you are likely to hear a lot about the term “force majeure,” which is French for “superior force.”
Many people and businesses, during the COVID-19 outbreak, have not performed, or will not be able to perform, their obligations under otherwise binding contracts. I suspect you have already seen some material on this subject, but here are my own preliminary thoughts.
First of all, a force majeure provision does not automatically appear in every contract. Where it does appear, it is sometimes detailed (listing the circumstances which would constitute a force majeure event), and sometimes just a generalized contract provision about the applicability of force majeure events. In my experience, force majeure clauses are more likely to appear in straight business arrangements (Manufacturer A agrees to supply parts to Wholesaler B for a particular price and by a certain date, or something like that), but less often (although certainly not prohibited) in leases. Sometimes a force majeure clause is drafted to “protect” one party to the contract and not the other.
As I recall, lawyers around the country began to see updated force majeure clauses after 9/11, essentially to add terrorist attacks as a specified force majeure event. However, I do not recall seeing any cases come through the judicial system which discussed the concept of force majeure in the context of terrorist attacks – which I suppose is a good thing.
More to the present situation, I have not seen any cases (and I have asked others) discussing how force majeure might apply in the context of the pandemic which we are now experiencing. There are a whole lot of issues which will likely be considered by people and businesses (and the court system), including:
- Will a pandemic be considered a force majeure? We all know of circumstances where a thriving business (normally able to pay rent or meet other legal obligations) simply cannot do so. As an obvious example, our office represents numerous restaurants whose business has simply dropped to close to zero (there is no way any sit-down restaurant can make up the lost business by offering take-out service). So, the threshold question is whether this pandemic will be considered a force majeure.
- In contracts where force majeure is not mentioned, will the courts expand the use of related concepts (such as contract impossibility) to include the pandemic?
- In my view, courts will not look kindly upon one-sided force majeure clauses … those which protect only one party, not the other.
So, what will happen? I suspect that most business contracts will be renegotiated in some way. For example, landlords and tenants might agree to waive the defaults (once normal business recommences) in exchange for a longer-term, a higher rate, or both. Of course, in many circumstances (for example, the most obvious of which is landlords who are not receiving rent), the failure to have a contract performed (i.e., paying rent) will have ramifications under loan documentation, which likely means that similar modifications will have to be made to loan arrangements or approved by the lender.
Let us know if we can assist you in dealing with contract or lease default scenarios.