litigating force majeure, impossibility and other

Litigating Force Majeure, Impossibility and

Other Contractual Performance Issues:

Lessons Learned in 2020

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THURSDAY, MAY 27, 2021

Presenting a live 90-minute webinar with interactive Q&A

Matthew G. Nielsen, Partner, Bracewell LLP, Dallas

David A. Shargel, Partner, Bracewell LLP, New York

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DAVID A. SHARGELBRACEWELL [email protected]

MATTHEW G. NIELSENBRACEWELL [email protected]

Litigation Force Majeure, Impossibility and Other Contractual Performance Issues:

Lessons Learned in 2020

May 27, 2021

Introduction

COVID‐19 gave rise to a variety of commercial disputes

Business disruption caused by COVID‐19 and accompanying government orders

Today’s presentation will focus on the following:

An overview of force majeure and alternative doctrines

Issues to consider in drafting force majeure provisions

What have we learned based on a year of COVID‐related litigation?

What’s next for force majeure litigations?

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A refresher:Force Majeure ‐ Generally

Defined

Force majeure is an affirmative defense to excuse a party’s failure to perform under a contract when the non‐performance is not caused by circumstances within the party’s reasonable control

It is difficult to find a universal definition because the contours of force majeure to a particular contract will generally be governed by the express language of the contract

Legal sources

Contract clauses

Uniform Commercial Code

Contracts for the International Sale of Goods (CISG)

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Typical contractual language that may be implicated by COVID‐19

“Acts of God”

“Pandemic,” “disease,” “state of emergency”

Labor shortages

“Acts of government”

Not caused by fault or negligence of party

Catch‐all language

Other contract provisions

Expressly or impliedly unilateral language

Delays, limitations of remedies, non‐refundable payments

Termination for (alleged) cause

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UCC Excuses seller’s performance where: performance as agreed has been made impracticable by the occurrence of a contingency the non‐occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid

Requires allocation of performance among customers “in any manner which is fair and reasonable”

Contracts for the International Sale of Goods (CISG) Art 79 provides for excuse of performance Excuses performance for “impediment beyond [the party’s] control”if the party “could not reasonably be expected to have taken the impediment into account” or “to have avoided or overcome it or its consequences”

Exceptions are made for third party performance

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Common principles used in enforcing force majeure provisions

Identifying triggering event ‐‐ contractual force majeure provisions will be construed narrowly by courts

Even if there is a triggering event, courts generally require that performance has become impossible, not merely more difficult or expensive

“Catch‐all” language

Ejusdem Generis

Causation

The triggering event must direct cause the inability to perform

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NoticeMost contracts have notice provisions, both from timing and substanceMany contracts will contemplate notice of the “force majeure event” whether or not the impacts on performance have yet occurred

Codified force majeure provisions also typically contain notice provisions

Courts will interpret a lack of notice as a condition precedent to the affirmative defense of a force majeure

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Unforeseeability

Texas TEC Olmos, LLC v. ConocoPhillips Company, 555 S.W.3d 176, 185 (Tex. App. – Houston [1st Dist.] 2018, pet. denied)

If relying on catch‐all to invoke force majeure, must show event was unforeseeable

Court held that drop in oil prices and resulting impact on ability to obtain financing was foreseeable and, therefore, Olmos could not rely on force majeure provision to excuse performance

New YorkGoldstein v. Orensanz Events, LLC, 146 A.D.3d 492 (1st Dep’t 2017)

Venue closed by order of NYC DOB; government orders listed as force majeure event

Court upheld denial of summary judgment to building owner because prior orders closing building made event foreseeable to owner

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Triggering Event

Does the contractual provision include specific triggering event?

Many older contracts do not include language such as “pandemic,” “disease,” “epidemic,” etc.

Is COVID‐19 an “act of God”?

Traditionally, the phrase contemplates force of nature, like earthquakes, tornados, floods

Black’s Law Dictionary ‐‐ “[a]n overwhelming, unpreventable event caused exclusively by forces of nature, such as an earth‐quake, flood, or tornado.”

Texas Pattern Jury Charge instruction – “An occurrence is caused by an act of God if it is caused directly and exclusively by the violence of nature, without human intervention or cause, and could not have been prevented by reasonable foresight or care.”

“If there be any co‐operation of man, or any admixture of human means, the injury is not, in a legal sense, the act of God.” Michaels v. New York Cent. R. Co., 30 N.Y. 564, 571 (1864).

Force Majeure ‐ COVID‐19

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“Act of Government” or “Illegal”

Stay‐at‐home orders

Essential versus non‐essential businesses

What is coming as orders are modified, loosened?

Labor shortage

May not include shortage of own employees

Recent meat processing plant closures have cause supply shortages


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Reduced demand as a triggering event

Market forces are typically not a force majeure triggering event

In the context of a demand drop triggered by COVID‐19, they may be

Catch‐all provisions

If in jurisdiction that requires event within catch‐all to be unforeseeable

Some argue that pandemics inevitable based on history (i.e., 1918 Spanish Flu)

Contracts entered into after more recent outbreaks (i.e., 2005 SARS or 2009 H1N1)


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Causation Direct versus indirect

Direct – stay‐at‐home order effectively shuts down a party’s manufacturing operation such that it cannot provide supplies to counterparty

Indirect – quarantine rules in China disrupts normal supply of component used in manufacturing products

Event cannot be result of party’s own negligence or fault Prior to widespread stay‐at‐home orders, some companies chose to take proactive measures that, while perhaps socially responsible, were not required Example – cancellation of international travel to secure component manufacturer

As preventative measures become more known, will claims of “fault” increase?


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Defining affected time period

Performance may be excused only during time in which event causes performance impossibility

Differing stay‐at‐home orders among varying jurisdictions with differing effects on a party’s operations

Opportunistic use of force majeure

COVID‐19 is causing large‐scale economic hardship for many companies

Companies are increasingly looking to use force majeure to excuse performance under contracts that are no longer economically beneficial


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Impossibility and impracticability

Common law doctrine(s) permitting narrowly‐defined excuse from performance

Excuse for impossibility or impracticability is a strict standard

Not available when one party to the contract assumed the risk

Some cases of impossibility are easy; supervening circumstances make performance objectively impossible

Providing a service on a date certain that is illegal under state or local stay‐at‐home order

In other cases, impracticability exists where “extreme, unreasonable, and unforeseeable hardship due to an unavoidable event or occurrence”

More than mere change in degree of difficulty or expense

May not be available where the contract already addresses force majeure

Texas and New York (if no FM clause), as well as California, recognize doctrine of impossibility

California and UCC ‐‐ impracticability

Alternative/Novel Theories– COVID‐19

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Frustration of purpose

Requires the following:

A change in circumstances that;

Makes one party’s performance virtually worthless to the other;

Thereby frustrating that party’s purpose in making the contract.

The event must be unforeseen, and must neither be caused by nor within the avoidance or control of the party.

The doctrine may be a better fit than impossibility or force majeure where performance or payment is not “impossible,” but circumstances still warrant relief from performance.

Available in New York and California

Texas recognizes in name only – impossibility standard

What theory applies?

Impossibility and impracticability ‐‐ performance of contractual duties impacted

Frustration of purpose ‐‐ purpose of contract is undermined

Alternative/Novel Theories– COVID‐19

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How have courts applied these principles to real‐world disputes related to the pandemic?

California: Concert organizer wants its deposit back.

Concert promoter sues Ellie Goulding and Lizzo for return of deposits for canceled Virgin Fest.

Concert did not go forward due to pandemic.

Very simple force majeure provision:

California: Concert organizer wants its deposit back.

But!

Lizzo & Goulding say they were ready, willing & able to perform.

Illinois: Chicago restaurant doesn’t want to pay rent In re Hitz Restaurant Group (Bkr. N.D. Ill. June 2, 2020)

Giglio’s State Street Tavern, Chicago.

Filed for bankruptcy and stopped paying rent in 2019 –pre‐pandemic.

Bankruptcy court must decide if debtor must pay post‐petition rent under 11 USC § 365(d)(3).

Section 365(d)(3) required debtor in possession to “timely perform all the obligations of the debtor . . . arising from and after the order for relief under any unexpired lease of nonresidential real property until such lease is assumed or rejected . . . .”

Giglio’s claims excused due to FM

Court finds in favor of Giglio’s on FM provision due to 3/16/2020 executive order suspending in person dining.

Order = “governmental action”

Order “hindered” Debtor’s ability to perform

Order was proximate cause of debtor’s ability to pay rent. . . .

Illinois: Chicago restaurant doesn’t want to pay rent

. . . “At least in part”:

Court finds that because Giglio’s could remain open for takeout and delivery, debtor required to pay 25% of rent.

Equitable solution.

New York: The Gap Claims COVID Means No Rent Gap Inc. v. Ponte Gadea New York LLC, No. 20

CV 4541‐LTS‐KHP, 2021 WL 861121 (S.D.N.Y. Mar. 8, 2021).

“Gap contends, in essence, that its closure of the two stores operating on the premises in response to the pandemic, the governmental measures taken in response to the pandemic that restrict or condition store operations, and changes in the volume of foot traffic in the vicinity of the stores warrant Gap's release from its obligations under the lease as of March 19, 2020.”

New York: GAP offers several arguments:

Casualty Event• Casualty

provisions in leases apply to singular incidents like fire that have a physical impact on the premises.

Frustration of purpose• Applies where

unforeseeable event renders contract valueless to one party.

• Inapplicable because government shutdown was foreseeable; the parties included it in the FM events definition.

• Not valueless because GAP offered curbside pickup and kept other locations open.

Impossibility• Conditions not

unforeseeable.• Parties foresaw and

apportioned the risk.• Curbside pickup means

not impossible.

What about force majeure?• The FM definition only operates to prevent certain non-monetary defaults from

triggering landlord’s right to terminate the lease. • Does not apply to failure to pay monthly rent when due.

• Common in commercial leases.

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Takeaways from cases: Force majeure provisions must be considered in conjunction

with other contractual clauses. (Lizzo)

Provisions should be drafted with clarity in mind, designed to avoid—not create—confusion amid a possible force majeure event. (Lizzo)

Courts will use their equitable powers to fashion an appropriate remedy. (Giglio’s)

Common law theories (impossibility, etc.) will be difficult to establish, but could serve to provide leverage in certain circumstances.

Define the Triggering Events

Given the widespread impact of Covid‐19, parties should address whether similar events will be covered Use terms like “disease,” “pandemic,” “epidemic,” “public health crisis,” and “state of

emergency” Consider whether to include stay‐at‐home orders and similar acts of government

Beware of ejusdem generis and over‐reliance on “act of God”

“if an event of force majeure occurs, including without limitation, declared or undeclared war, sabotage, riot or other acts of civil disobedience, acts or omissions of government, labor disputes, shortages of fuel or other materials, accidents, fires, explosions, floods, earthquakes, or other acts of God, which significantly impairs Lessee’s ability to operate a high‐end eighteen (18) hole golf course...Lessee may elect, within one hundred and twenty (120) days of…the occurrence of a Force Majeure Event…to cancel this Lease and surrender possession of the Leased Premises.”

Drafting Considerations

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Define the Impact on Party’s Ability to Perform

Many states, including Texas and New York, will generally not excuse performance merely because it has become more difficult or expensive. Absent specific language, most states will require that performance was made impossible or impracticable

Consider when a force majeure event allows termination of agreement versus temporary non‐performance

“if an event of force majeure occurs… which significantly impairs Lessee’s ability to operate a high-end eighteen (18) hole golf course...Lessee may elect, within one hundred and twenty (120) days of…the occurrence of a Force Majeure Event…to cancel this Lease and surrender possession of the Leased Premises.”

Consider whether to address disruptions to supply chains, labor force due to unreasonable health risks, and/or access to financing (if not otherwise covered)


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Define the Scope of Performance Excused

Palm Springs Mile Associates, Ltd. V. Ross Dress for Less, Inc., No. 20-cv-21865 (SD Fla. May 4, 2020)

Landlord claims breach of commercial leases and accelerated rent.

Force majeure clause excludes making of payments.


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Other Issues to Consider

Unforseeability/Knowledge Some jurisdiction and form provisions require that the force majeure event

not to be within the parties’ knowledge or reasonably expected

Notice Provisions Defining when notice must be provided and what details about how the

event has impacted performance

Duty to Mitigate Many states (including Texas and New York) do not impose duty to mitigate

in context of force majeure


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Sample Post‐Pandemic Force Majeure Provision (retail lease) "Whenever a period of time is herein prescribed for action to be taken by Landlord or Tenant, Landlord or Tenant will not be liable or responsible for, and there will be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, terrorism, governmental laws, regulations or restrictions, a Government‐Mandated Quarantine (as hereinafter defined) or any other causes of any kind whatsoever which are beyond the reasonable control of Landlord or Tenant. A “Government‐Mandated Quarantine” means a voluntary or mandatory quarantine directed by the federal, state or local government or the Centers for Disease Control and Prevention as a result of a health‐related pandemic, such as, by way of example, those arising as a result of the COVID‐19 pandemic. Nothing contained herein delays the performance by Tenant of the payment of any monetary sums due herein, provided, however, if a Government‐Mandated Quarantine is in place, then (i) the payment of any Minimum Rent due hereunder will be excused on a day for day basis (up to a maximum of 90 days in any given calendar year) while the governmental order (a “Government Order Closure”) remains in place, which will not excuse Tenant’s payment of any Operating Expenses Rent or other sums that are due under this Lease during the entire period of a Government Order Closure, and (ii) for each day that a Government Order Closure exists, but subject to the terms of this Section ___, the Term will be extended on a day for day basis based on the duration of the Government Order Closure."


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Pre‐suit best practices Parties seeking to invoke force majeure provision

Provide notice early even if not required Communicate with counterparty – agreed substituted performance, waiver, etc.

Keep detailed, centralized records related to non‐performance, including: Timeline of events leading to inability to perform Relevant government orders and pronouncements Progression of force majeure event Efforts to avoid event or find alternative means for performance Negotiations efforts

Be aware, courts will view this as an equitable or quasi‐equitable relief

Making or Defending the Claim

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Pre‐suit best practices Parties seeking to rebut or avoid force majeure

Respond to any notice; keep responses realistic, professional and performance‐oriented

Communicate with counterparty – agreed substituted performance, waiver, etc.

Keep detailed, centralized records related to non‐performance, including: Timeline of events that might provide counter‐narrative for claimed force majeure

Relevant government orders and pronouncements Efforts to avoid event or find alternative means for performance Negotiations efforts

Damages or losses incurred in non‐performance

Be aware, courts will view this as an equitable or quasi‐equitable relief


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Bringing the Force Majeure Claim to a Head

Contractual pre‐suit negotiation process/period? Self‐help non‐performance

Leading to claims of breach Leading to anticipatory breachOther contract remedies

Declaratory judgment action Suing (or being sued) for breach

Force majeure as an affirmative defense Choice of law, venue and arbitration provisions


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With COVID restrictions easing, what’s next on the litigation horizon for force majeure and related doctrines?

Texas winter storms.Parties, especially in the energy industry, will likely need to reshape the ways in which force majeure provisions are drafted going forward.

Supply chain disruptions. Shipping delays Lack of materials (semiconductors, etc.)All could lead to force majeure events and related litigation.

Cybersecurity / ransomware attacks. Large scale attacks like Colonial Pipeline likely to lead to force majeure litigation.

What’s Next?

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litigating force majeure, impossibility and other

Documents