Can ‘Force Majeure’ Protect A Commercial Enterprise During COVID?

Since the onset of the national COVID-19 pandemic in the U.S. around this time last year, businesses have been struggling to survive, and more than a few have tried to use “force majeure” provisions in contracts to escape or mitigate what would have been their ordinary contractual obligations. 

Courts have looked on these claims with varying degrees of support or suspicion, and it is worthwhile looking at three cases, each with a specific outcome, that might offer some guidance to lawyers and business leaders as they assess whether and how to use these provisions, in connection with the pandemic or for any other unexpected event.

Hitz Restaurant Group: The Force Majeure Sliding Scale
In the bankruptcy of Hitz Restaurant Group before the U.S. Bankruptcy Court of the Northern District of Illinois, Eastern Division, the Court applied a reasonable solution that likely satisfied neither the tenant nor the landlord, based on the facts.  The restaurant filed for bankruptcy in February 2020, and the landlord immediately sought an order compelling the tenant to pay its rent for March and thereafter, or to vacate the space.

The landlord pressed the very language of the clause that “lack of money shall not be grounds for Force Majeure,” despite the unexpected pandemic.  The landlord further argued that Illinois Governor J.B. Pritzker’s COVID shutdown orders did not precisely prevent the restaurant from paying its rent. The court did not agree: “The force majeure clause unambiguously applies,” the court wrote, adding that the “triggering event [the pandemic] was in fact the proximate cause of the party’s nonperformance.”

Despite the seemingly tenant-leaning language, the judge had some limited mitigation in mind. Despite the drastic downturn in business imposed by Hitz’s “disappearing” customers, the court noted that the restaurant could still offer carry-out, curbside pick-up, and delivery services, and thus the rent was not to be entirely suspended, but instead pro-rated as a percentage of the falloff in business.

Ultimately, the court found that the restaurant had to continue to pay 25% of its rent and other charges, even during the worst of the pandemic. The ruling gave something to each side, undoubtedly both pleasing and disappointing both.

LESSON: Many courts will look for a practical interpretation of the parties’ lease agreement in order to find equity in the age of COVID. You can hope for the best, but you should prepare for the worst, or at least for the worse.

Art Auction: New York auction house Phillips Auctioneers, agreed to sell one of the untitled works of noted painter Rudolf Stingel at a June 2020 auction on behalf of JN Contemporary Art, a corporate arm of the Nahmads, a well-known family in the art-dealing world. Phillips guaranteed a minimum price of $5 million, regardless of the result of the auction, to secure the contract. 

Then came the pandemic and New York Governor Andrew Cuomo ordered no unnecessary gatherings, certainly no in-person art auctions. 

The two parties discussed alternatives. But ultimately, the auction house invoked the force majeure provision of the contract, arguing that if, for reasons beyond its control, it couldn’t sell the painting at the main event—the semi-annual in-person auction it had originally planned for June in New York--it was not obligated to try to sell it at all. Phillips pulled the plug, and declined to try to sell the painting in what was obviously a softening art market. 

The Nahmads sued, arguing that the auctioneer, in voiding the contract, was just preventing its own loss, since the price for Stingel paintings had been somewhat variable in the recent past, particularly since the beginning of the pandemic.

Said the court: The motivation doesn’t matter; the force majeure clause says a “natural disaster” can bring to an end the other terms of the contract. The auctioneer has the right to walk away, even if alternative dates and venues were possible, and were contemplated and discussed. 

The Nahmads also complained that a pandemic is not specifically mentioned among the list of nasty eventualities, such as a “natural disaster,” contemplated in the contract’s force majeure clause. True, said the judge, but added, COVID certainly IS a natural disaster, since it arose from nature, and it is a catastrophe, also known as a disaster.

LESSON: A force majeure clause can get a party out of a signed agreement, even if there are obvious alternatives to the original agreement between two parties. The court found that if a business can’t fulfill the original obligation because of an “Act of God,” it is not obligated to fulfill any obligation at all.    

Cinemex USA: Another Openin’, Another Show
Cinemex USA operates high-end, dine-in movie theaters in 12 states. When Florida Governor Ron DeSantis closed theaters and other businesses last year amidst the surge in COVID-19 cases, the theater chain suspended payment of the rent on its Lakeside, Florida location, invoking a force majeure clause that seemed to suspend its obligation to pay for as long as the Governor’s order was in effect. The Mexican-based company declared bankruptcy in April, and closed all its U.S. theaters.

DeSantis lifted restrictions earlier than some other states’ governors, allowing theaters to reopen on June 5, 2020, while restricting them to allow only half of each “house” to be filled for each show.

Cinemex argued it would lose money under these circumstances, given a) severely depressed audience numbers, even beyond the capacity limit, despite the lifting of the ban, since moviegoers were staying home out of concern about the epidemic; and b) the absence of new movie releases emerging from Hollywood in the wake of the epidemic, meaning there was even less incentive to venture out to visit a high-end, first-run theater. The company should thus still be protected by the force majeure clause, when plainly the epidemic was still causing the company’s misfortune and killing any chance it had to recoup even its basic operating costs.

The court disagreed. After the Governor lifted the theater ban, the decision to remain closed was an economic one, not covered by force majeure, the judge wrote. The company could have reopened—in fact, some of its other theaters did—and thus its obligation to pay rent resumed on June 5, with or without an audience.

LESSON: Your force majeure clause is not all-purpose protection. If you can operate, even at a loss, then a court may demand you make good on the contract, even if doing so might cripple you.

Possible happy ending: In December, Cinemex announced a reorganization plan in which its rent, for the time being, will amount to paying a percentage of ticket and food revenue to its landlords, as a substitute for a set amount. Since most of the theater landlords cannot use the space for anything other than showing movies, they seem pleased with the resolution. 

Ultimately, force majeure clauses are rarely a “get out of jail free” card unless carefully and narrowly tailored to the specific circumstances at hand.  Drafting them and litigating them in the wake of the COVID pandemic is a new frontier in protecting parties and will undoubtedly be the focus of significantly more negotiation than ever before.  

Danielle C. Lesser of Morrison Cohen LLP is an experienced trial attorney with a focus on retail clients in the fashion and apparel industries. She is chair of the firm’s business litigation department.