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COVID-19 already blowing dust off ‘force majeure’ clauses

BY DAVID DONOVAN and KRIS OLSON

The decision to cancel this year’s NCAA men’s basketball tournament in response to the COVID-19 pandemic was heart-wrenching for more than just die-hard college basketball fans. The tournament generates more than $1 billion in revenues for the NCAA, the overwhelming majority of its revenues for the entire year. The large majority of that money comes from the NCAA’s contracts with the television networks that broadcast the games. Organizers of the Olympics, an even bigger television bonanza in grave danger of being canceled next, are sitting very uneasily now too.

Dejected NCAA executives can draw cold comfort knowing that those expensive TV contracts at least contain “force majeure” clauses, a French phrase meaning “superior force,” and one of those legal terms that lawyers may vaguely remember from studying for the bar exam and not thought much about since. Indeed, some businesses may have paid little attention to them before entering into contracts. But with the pandemic forcing untold numbers of companies to renege on their contractual obligations, force majeure clauses are now roaring back with a vengeance.

A force majeure clause will typically lay out a set of unforeseeable circumstances that would permit either party to free itself from its contractual obligations. They typically mention acts of god, war, terrorism, and the like, but, crucially, prior to this crisis many of them neglected to specifically mention pandemics. In the short term, the most immediate impact of COVID-19, aside from reminding everyone why these often-overlooked clauses are so vitally important, is that attorneys are having to move quickly to rewrite force majeure clauses to correct this omission in any new contracts.

“I think one of the most critical issues attorneys need to keep in mind, for new contracts that are being entered into now, is that we know about this virus, and so it’s no longer an unforeseeable event,” said Ward Davis of Bell, Davis & Pitt in Charlotte. “At least three weeks ago one of my partners started making specific references to the coronavirus in at least one construction contract. For new contracts, it’s even more important to add in some language specifically addressing this issue.”

A knotty legal issue then for anyone who signed a contract in, say, early March. But for contracts entered into long ago whose performance is now being frustrated by the pandemic, it’s clear that there are going to be a lot of contractual disputes in which force majeure clauses are going to be front and center, and a lot of arguing about whether the specific language of a clause was intended to encompass a pandemic like COVID-19.

We’re all in this together

The fact that COVID-19 is upending so much of society in such a shockingly short period of time and causing an economic downturn that presents an existential threat to so many companies gives parties a great deal of incentive to negotiate some sort of amicable resolution to their contractual disputes rather than fight this stuff out in litigation.

“My hope and my guess is that parties are going to be looking for more of a cooperative solution, because holding tightly to a particular schedule or a particular set of circumstances in contracts is going to be put up against the public health filter,” said Brian Schoolman of Safran Law Offices in Raleigh. “Hopefully they can work it out through negotiation and come to some form of compromise … if you push too far, you could end up with one of the parties having to deal with a threat to its existence. It’s better to negotiate than to have to deal with a bankruptcy filing.”

Attorneys will need to address these issues with clients sooner rather than later, and many companies will want to start thinking about these issues now, even if they’re not currently breaching any contracts. Right now, at the very outset of the crisis, many companies are finding themselves in the same boat. It’s a time when solidarity is likely to be highest, and companies most inclined to work things out amicably.

Additionally, companies need to assiduously document the direct causal links between the pandemic and any breach of contract. A breach caused directly by the pandemic itself may ultimately be deemed to have been caused by an “act of god,” especially if a business was forced to shut down by order of the local government. Conversely, a breach caused by the economic carnage inflicted as a knock-on effect from the pandemic, of which there will certainly be plenty, will definitely fall outside the scope of any force majeure clause.

“What I’ve recommended is to talk with your clients now, even before any impacts from this may arise,” Schoolman said. “It’s much better to talk to your clients now to bring up what could happen and how to plan for it rather than waiting for the impact to start showing up … What I’m telling clients is to look first to your contract to see what’s provided.”

What’s the worst that could happen

But regardless of what attorneys and companies do to get out in front of this issue, it seems inevitable that a lot of contract disputes are going to be headed to litigation.

“The unfortunate reality of what we’re entering right now is at least an economic downturn and probably a recession, and those things create litigation because companies are failing and companies can’t meet their contractual obligations. We will be litigating a lot of contract issues related to this for the next two years, and force majeure issues are going to arise,” Davis said. “This is an issue that is going to be front and center in a lot of litigation related to this time period.”

Partly because they so infrequently get tested in the real world, there isn’t a lot of case law interpreting force majeure clauses, but there is some. One example is OWBR LLC v. Clear Channel Communications, Inc., decided by U.S. District Court Judge Alan C. Kay in Hawaii in 2003. It involved the cancellation of a music industry event and conference that had been planned for the Outrigger Wailea Resort for February 2002, five months after the Sept. 11 terrorist attacks.

OWBR stands for the proposition that a party won’t be able to invoke a force majeure clause when performance merely becomes uneconomic, rather than impossible, said Boston attorney Gregory S. Bombard. The defendants argued that the Sept. 11 attacks had drastically reduced their number of expected attendees, from 102 companies the year before to 38 in 2002.

The force majeure clause provided an excuse for emergencies that were out of the parties’ control, if performance became “inadvisable, illegal or impossible.” But Kay ruled that “economic” inadvisability is not what the force majeure clause was meant to address. Moreover, Kay worried about opening the floodgates.

“To excuse a party’s performance under a force majeure clause ad infinitum when an act of terrorism affects the American populace would render contracts meaningless in the present age, where terrorism could conceivably threaten our nation for the foreseeable future,” Kay wrote, adding that if the timing of the event had been closer to Sept. 11, it would have strengthened the defendants’ argument.

Kay allowed that the Sept. 11 attacks were an “extreme, unforeseeable occurrence which is of the magnitude to trigger a force majeure clause.” But he found that the defendants still had not met their burden of demonstrating that performance was “objectively inadvisable.”

Bombard said the fact that OWBR wasn’t decided until 2003 raises an important consideration when assessing litigation risk: What looks like a reasonable excuse today may not be by the time a case finally goes to trial.

“You just don’t know what the world is going to look like in July, and you certainly don’t know what it will look like in 2023, when the case is before a judge or jury,” Bombard said.

People are not always keen on contemplating worst-case scenarios or scrutinizing the language of force majeure clauses. That’s likely to be one of many ways in which life will be different after COVID-19.

Follow David Donovan on Twitter @SCLWDonovan

 

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