August 4, 2021. Typically, a force majeure clause in a commercial lease includes several events including "acts of God" defined by Merriam-Webster as the "extraordinary interruption by a natural cause (such as a flood or earthquake) of the usual course of events that experience, prescience, or care cannot reasonably foresee or prevent." Fallout from COVID-19. Setting aside the determination of what the word failure means, which was addressed in the case, the words occasioned by or in consequence of are also crucial. A representative case is In re CEC Entertainment, Inc., 625 B.R. From March to April 2020, 22 million workers lost their jobs, causing the unemployment rate to soar from 3.5% to 14.7%. The contract might, however, require a unit to exercise such rights within a specific period of time. In Bay City Realty, LLC v. Mattress Firm, Inc., 2021 WL 1295261 (E.D. But outcomes for tenants were not always so bleak. Force Majeure Clauses in Employment Agreements Going Forward Unfortunately, natural disasters like 100-year floods or hurricanes are seemingly no longer 100-year events. To constitute a force majeure, it is likely that the language in the clause in question must explicitly capture an event like COVID-19 - for example, by using language like "pandemic",. Was the change so radical as to strike at the root of the contract? The causation requirement may cause trouble for many firms that are unable to perform because of the financial and economic crisis that has followed on the heels of the pandemic, rather than because of the pandemic itself. For greater certainty, subject to subsection (3), the Licensee shall not be entitled to a refund of Rent and shall be liable for any Rent owing in accordance with the payment schedule. FIDR, ASCMA (UK), MICA, ABR. The court rejected the force majeure defense because the force majeure clauses explicitly excluded inability to pay from the definition of force majeure. While the events listed in a force majeure clause vary from contract to contract, courts generally require that a force majeure event be both beyond the contracting parties' control and unforeseeable at the time the contract was signed. Review your contract to determine whether the contract includes a force majeure provision and, if so: Carefully review the definition of force majeure in that contract to determine whether there is any express event incorporating events such as COVID-19 and, if not, whether the general language is sufficient to include COVID-19 and its consequences. A typical force majeure clause defines or lists the events that excuse performance; specifies the standard that must be established to excuse performance; sets forth additional . Depending on the nature of the contract, it may be nearly impossible to adequately mitigate, of course, given the rapid changes that are taking place on a near daily basis. Force majeure is a type of contractual clause which will exclude one or more parties from having to perform their obligations under a contract if a certain event arises, known as the "supervening event". The clause in Atcor Ltd. v. Continental Energy Marketing Ltd. (cited above) is also elucidating. The cases are nonetheless important. As the court set out in Atlantic Paper, these clauses excuse non-performance of a contractual obligation upon the occurrence of a specified, unforeseeable (or at least unpredictable) event or circumstance that is beyond the parties control. As is evidenced by the analysis in Atlantic Paper, whether an event qualifies under a force majeure clause depends on the facts of the case, the wording of the clause, and the obligation from which a party seeks excuse. To illustrate, a government's classification of COVID-19 as a "pandemic" could trigger a force majeure clause that expressly contemplates pandemics. While this analysis focuses primarily on the position under English law, we have included a PRC law perspective because of the significant impact COVID-19 has had on business in China. 2021), for example, a student sued a university for breach of contract after it moved classes online. Fla. Sept. 9, 2020), a court held that a government shutdown order would not trigger a force majeure clause merely because it deprived the tenant of the revenue it needed to pay the landlord. Parties that enter new contracts during periods of relative economic normalcy will need to address the possibility, even likelihood, of periodic government-ordered lockdowns or other pandemic-related interruptions of economic activity during the period of their contractual relationship. In the context of the coronavirus pandemic, one important consideration for any notice provision will be when "the event . It is the consequences of COVID-19 and its impact upon the ability of the affected party to fulfil its contractual obligations that will be relevant. leave to appeal refused 1996 CarswellPEI 32 (P.E.I. The debtor argued that the pandemic was an act of God, and that either it or the government shutdown orders prevented it from operating. While these orders may be resisted in some instances, it is widely thought that without governmental support, there will likely be fewer force majeure claims made by Chinese companies. The current pandemic may continue in some places, and even if it does not, future pandemics may occur. whether the relevant supporting documentation or information has been provided. In this case, the question for my client becomes (1) has the Citys Medical Health Officer defined COVID-19 as an epidemic and (2), does pandemic mean the same thing as epidemic? COVID-19 and Force Majeure In JN Contemporary Art LLC v. Phillips Auctioneers LLC, 2020 WL 7405262 (S.D.N.Y. "in circumstances such as the outbreak of a pandemic, like the current covid-19 outbreak, the grounds on which the tenants/ lessees or other similarly situated parties could seek waiver or. An argument that it is unforeseeable that the virus could affect a partys performance of an agreement is likely to be questionable and unrealistic at best, and unenforceable at worst. The reason is that most courts interpret such phrases as implicitly requiring that the event in question was unforeseeable. When "Force Majeure Events" occur, the force of a portion, if not all, of the liability for damages arises from the breaching party. Do you (already) have an example of a force majeure clause which is "corona future proof" or "virus proof" and you willing to share that with us? C.A.) The COVID-19 pandemic profoundly disrupted the performance of business contracts around the globe. The contract may additionally require the notice to state the anticipated consequences and duration of the force majeure event. The facts of every single contract will need to be considered to ascertain whether the event actually was beyond a partys reasonable control. 580 at para. To be eligible for force majeure protection under PRC law, the affected party must demonstrate that the relevant situation is unforeseeable, unavoidable and cannot be overcome, and also that it is the cause of the affected partys inability to perform its obligations. Given the continued impact that the spread of COVID-19 is having upon global businesses, it is possible that there may be fewer mitigation measures available to parties than in other potential events of force majeure. Contractual remedies for force majeure typically include an extension of time to perform those obligations or suspension of contractual performance for the duration of the force majeure event. The COVID-19 Pandemic and Force Majeure Clauses The COVID-19 pandemic, and the accompanying government public health orders, caused the greatest economic turmoil in the United States in living memory. force majeure means the occurrence of event (s) or circumstance (s) which could not have been foreseen at the time the contract was entered into, which prevents or impedes a party from performing one or more of its contractual obligations under the contract. Many force majeure provisions include reference to an "action" or "order" from the government. A party involved in back-to-back contracts or a network of interrelated contracts will need to take a strategic approach, taking into account the overall impact of the claim for force majeure on its obligations under the related contracts. In order to be prepared for different scenarios as the situation continues to unfold, we recommend that clients consider taking the following proactive steps. The answer to this question turns, in large part, on the exact wording of the clause itself. Pandemic-related disruptions of transportation, including commercial air travel, also created disputes between travelers and shippers, on the one hand, and carriers, on the other. [a] harsh result, to be sure, but so in its own way would be mass rescission of commercial leases, assigning all risk of the pandemic to property owners who face their own unrelenting expenses and economic burdens. It found that while the rise in interest rates was a matter beyond Joness control, its failure to obtain financing was not the result of a cause beyond its control. When Can a Business Rely on COVID-19 as A Force Majeure? A subset of these cases involved attempts by parties to escape their contractual obligations based on force majeure clauses or common law theories of impossibility or frustration. Nor would an economic downturn or other general adverse business conditions likely be sufficient, even if it could clearly be shown that a key trigger for the downturn was COVID-19. [2] Below are a few practical tips for attorneys and procurement officials who might be called upon to interpret these contractual provisions in the coming weeks and months. I rely on this contract throughout this paper as a useful and relatable example: (1) As used in this section, Force Majeure means any event beyond the control of a the Licensor or the Licensee, as the case may be (a Party) (other than as a result of financial incapacity or financial inability of such Party, which, for greater certainty, shall not be considered an event beyond the control of a Party) and not caused by an act or omission of such Party, including, but not limited to: (i) a lack or an inability to obtain materials, goods, equipment, services, utilities or labour; (ii) any new statute, law or order-in-council or any regulation or order or amendment thereto passed or made pursuant thereto; (iii) an inability to obtain any licence, permit, permission or authority from an entity; (iv) a strike, labour dispute, work stoppage, lockout, slow-down or other combined action of workers; (v) earthquake, flood, fire or other casualty; (vi) an act of terrorism, civil commotion, war, invasion, embargo, insurrection, rebellion, sabotage, riot, violence, sabotage by other than a Party, malicious mischief by other than a Party, act of public enemy, or extortion; (vii) any epidemic, as identified by the Medical Officer of Health for the City of Toronto, and, and which shall cause such Party to be unable to fulfil or to be delayed or restricted in the fulfilment of any obligation hereunder. As a helpful example, a client of mine sent me the following language, which is in one of its contracts. Take the following example: Party A fails to supply goods to a customer, having shut its factory and stopped all production. Any clause addressing the COVID-19 issue needs to be drafted on a case-by-case basis under German law, in particular as COVID-19 is not an unforeseeable event anymore. In the case of the frustration doctrine, it is usually the buyer who seeks to escape its obligation to buy goods. In times like these, both parties are likely interested in seeing contracts through; it is better for business, better for the economy, and better for our recovery. Indeed, the question remains: did this unforeseen event have an actual and direct impact on the relying partys ability to perform their contractual obligation? My client is a non-profit and this contract is for the rental of space for my clients biggest, blockbuster event. In re Hitz Restaurant Group, 161 B.R. In the case of my clients contract, the phrase used is unable to fulfil or to be delayed or restricted in the fulfilment of any obligation hereunder. No. If a contract does not include a force majeure provision, it will be implied. This website uses cookies to improve your experience while you navigate through the website. psychic characters in tv shows; raffel systems touch screen For example, an affected subcontractor under a PRC governed law supply contract may have a valid claim under that contract, while the contractor, with an English law governed commercial arrangement with the owner, may not. In such situations, both parties are discharged from further performance of their obligations under the contract. About a month later, Jones began construction. Force majeure clauses vary in their notice requirements. 2427356 VAT 321572722, Registered address: 188 Fleet Street, London, EC4A 2AG. Some force majeure clauses allow one or both parties to. Second, as we have seen in the commercial lease cases, most courts require tenants to pay the rent even if their business is shut down by a pandemic if the force majeure clause does not apply to inability to pay. However, at least one court did reduce the rent payments of the tenant. A partys ability to claim relief for a force majeure event therefore depends upon the terms of the contract, and the force majeure provision in particular. If there were problems that pre-dated the execution of the contract or if the clause is relied on as an excuse for other business issues, your clients reliance could be jeopardized. If bankruptcy must be the result because someone must bear the losses associated with the pandemic, it is not clear why bankruptcy of tenants is worse than bankruptcy of landlords. To view or add a comment, sign in. When a force majeure clause exists, the courts duty is to interpret the clause in the light of events that gave rise to the dispute. A force majeure event refers to the occurrence of an event which is outside the reasonable control of a party and which prevents that party from performing its obligations under a contract. Unlike a one-off event such as natural disaster, which is usually limited in time and confined to a particular geographical locale, the COVID-19 outbreak has been dynamic and has been characterized by its ability to proliferate rapidly and unexpectedly across multiple countries and geographical regions. These provisions are typically towards the end of a commercial contract and have become a common boilerplate provisions. Step 2: Read your force majeure clause While obvious, this step is critical because the general rule is that a force majeure clause must include the event in question in order to excuse (or, in some cases, merely suspend) performance. A partys entitlement to remedies will depend upon the scope of a change in law provision. What are the Consequences of Relying on the Force Majeure Clause? Consider what the consequences of a successful claim for force majeure are. If the parties agree that the force majeure clause applies to COVID-19 (or a court makes this finding), most contracts, like my clients contract, excuse the parties from performance of any obligation under the contract to the extent the performance of the obligation is related to the force majeure event. From March to April 2020, 22 million workers lost their jobs, causing the unemployment rate to soar from 3.5% to 14.7%. Additionally, COVID-19 (or the event to be relied on) must have an actual and direct impact on the relying partys ability to perform their contractual obligation. Depending on the context, COVID-19 could arguably be included within the scope of broader phrases, such as Act of God, or plague or circumstances beyond a partys reasonable control. You and your client may to do more fancy footwork to make this argument, but at first blush the pandemic seems to instinctually meet these definitions. N.D. Ill. June 3, 2020), was another pandemic-induced bankruptcy. Force Majeure clauses are 'forward-looking' and usually specify an act such as a war or an epidemic to be a contingency on the occurrence of which non-performance is excused. In the words of the Supreme Court of Canada: An act of God clause or force majeure clause [] generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible. The implications of your clients reliance on the clause must be carefully assessed in relation to the specific bargain struck by your client and the other party, as reflected by the words of the contract itself. Did the market become nonavailable because of something unexpected happening after the date the contract was signed? While a financial panic was narrowly averted by the Fed in March 2020, and an eviction moratorium and government transfers prevented widespread suffering, the economic turmoil played havoc with business relationships. The court found that the lease had been frustrated because it permitted the mattress store to use the premises only for selling mattresses: the store could not use the premises for any other activity such as storage, and hence the entire value of the lease was destroyed. Where different laws govern back-to-back contracts, the differing interpretations of force majeure under those laws requires careful consideration. The buyer argues that the economic purpose for which it bought the goods has been frustrated by supervening events. 1. As you can see, the contract describes the impact of a force majeure event. Retail stores closed their doors or reduced operations because the pandemic deprived them of customers or because the government ordered non-essential businesses to close. The tent collapsed in heavy rain and was irreparably damaged. COVID-19 has made it abundantly clear that businesses should take care when entering into contracts or issuing terms of business to ensure they are protected in situations where they (or the other party) cannot fulfil their obligations through no fault of their own.
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