Tour de Force: When Is COVID-19 the Cause of Nonperformance?

With respect to causation, Force Majeure Clauses often state that the defect in performance must have been “caused by,” “due to,” or “on account of” the Force Majeure Event (or some analogous formulation). Most courts interpret this language as requiring proximate causation, but do not require that the Force Majeure Event be the sole cause of the defect in performance. Rather, the standard is met if the event was a substantial factor in causing the deficiency, even if other events outside of Force Majeure contributed to the deficiency. Moreover, if the clause in question expressly covers delays in performance (i.e., as opposed to being limited to a total failure to perform), the parties are not required to show that the Force Majeure Event rendered performance impossible.

The causation analysis becomes more complex when multiple concurrent events—some qualifying as Force Majeure Events, some not—contribute to a defect or delay in performance. Typically, the Force Majeure Event does not necessarily have to be the sole cause of the defect in performance, so long as the defect would not have occurred but for the Force Majeure Event. See, e.g., Toyomenka Pac. Petroleum, Inc. v. Hess Oil Virgin Islands Corp., 771 F. Supp. 63, 67 (S.D.N.Y. 1991) (Force Majeure Clause excused oil refinery’s delay in accepting cargo after Hurricane Hugo damaged its facilities; rejecting supplier’s argument that refinery’s post-hurricane decision to prioritize other supplier’s cargo over plaintiff’s was an intervening cause that broke causal link between hurricane and delay). 

In the COVID-19 era of Force Majeure litigation, we anticipate that the concurrent event/causation issue will arise with some frequency. Parties seeking to invoke COVID-19 (or related governmental shutdown orders) as Force Majeure Events should be prepared for the argument that the actual proximate cause of nonperformance is not COVID-19 or the shutdown orders, but instead the global financial crisis that flowed from the pandemic. Early cases indicate that, to circumvent arguments of this nature, parties invoking Force Majeure are pleading multiple causation theories in the alternative. See, e.g., Banco Santander (Brasil), S.A. v. American Airlines, Inc., No. 20-cv-3098 (E.D.N.Y. 2020) (arguing that cessation of air travel between the United States and Brazil was due to “the COVID-19 pandemic and the resulting government-imposed measures and unprecedented decline in demand for air travel,” each independently excusing performance).

Finally, a failure to mitigate the effects of a Force Majeure Event may be treated, effectively, as a factor that breaks the chain of causation between the event and the deficient performance. See, e.g., Butler v. Nepple, 54 Cal. 2d 589, 599 (1960) (labor strike did not excuse performance when the invoking party could have found an alternate supplier whose increased costs were not “extreme and unreasonable”); Freter v. Embassy Moving & Storage Co., 218 Md. 12, 16 (1958) (force majeure did not excuse damage to goods wet by hurricane when invoking party negligently failed to dry goods after the hurricane). The obligation to mitigate could take on new significance in the COVID-19 era. For example, if an event coordinator purports to terminate a rental space agreement based on the theory that governmental orders prohibit large gatherings, and the coordinator could have complied with the orders by hosting the event with smaller crowds but chose not to do so in light of reduced revenues, the coordinator may find itself without relief even if the Force Majeure Clause covers governmental orders and pandemics.

Developing COVID-19 Force Majeure Case Law

FEDERAL

Central District of California (Extension of closing date)

Pacific Collective, LLC v. Exxonmobil Oil Corp., No. 2:20-cv-03887-ODW-RAO (C.D. Cal. 2020) (Commercial real estate buyer seeks to extend closing date of real estate purchase on basis that Safer-At-Home orders constitute force majeure as defined in purchase agreement; Removed from California state court on April 29, 2020; Case transferred from Judge John A. Kronstadt due to self-recusal.) (04/03/2020 Complaint; 04/30/2020 Order to Reassign Case; 05/05/2020 Order Returning Case For Reassignment Upon Recusal)

Southern District of Florida (Excuse from rent payment)

Palm Springs Mile Assocs., LTD. v. The Men’s Wearhouse, Inc., No. 20-cv-21965 (S.D. Fla. 2020) (Men’s Warehouse invokes force majeure defense against breach of contract claim, alleging its obligation to pay rent was excused by COVID-19; Suit voluntarily dismissed on June 1, 2020.) (05/11/2020 Complaint; 06/01/2020 Notice of Voluntary Dismissal)

Northern District of Illinois (Excuse from rent payment)

In re Hitz Rest. Grp., No. 1:20-br-05012 (Bankr. N.D. Ill. 2020) (Restaurant-group tenant invoked “governmental action” phrase of force majeure clause to argue rent obligation was excused by the Illinois Governor’s Coronavirus Order shutting down on-premises dining, theorizing that the Order prevented it from operating its business; Court agreed in part, holding tenant’s rent obligation would be reduced on a pro rata basis in accordance with the decrease in revenues from its inability to offer on-premises dining.) (04/27/2020 Creditors’ Motion for Relief from Automatic Stay; 05/12/2020 Debtor’s Response; 05/26/2020 Creditors’ Reply; 06/02/2020 Memorandum Opinion) (See our prior article on this decision and a recent in‑depth analysis of this decision.)

Eastern District of New York (Excuse from transaction closing; Excuse from contract performance)

Gomel Capital Partners LLC v. 601 NE 29 Drive, LLC, et al., No. 1:20-cv-01922-FB-JO (E.D.N.Y. 2020) (Plaintiff seeks to terminate real property purchase contract and to recoup $275,000 deposit, alleging that the “outbreak of the COVID-19 global pandemic is a Force Majeure event, a quintessential ‘act of God’,” and invoking contractual provision that permits termination when a Force Majeure event prevents performance of the contract for “more than 30 days beyond the Closing Date;” Defendant’s Answer was due on May 20, 2020 but to date has not been filed; Court ordered that no later than July 3, 2020, one of the following events must occur: (a) the defendant must file an answer, (b) the parties must file a stipulation extending the defendant’s time to answer, or (c) the plaintiff must file a request for a certificate of default.) (04/27/2020 Complaint)

Williamsburg Climbing Gym Co. LLC and Fifth Concerto Holdco, Inc. v. Ronit Realty LLC, No. 1:20-cv-02073 (E.D.N.Y. 2020) (Tenant seeks rescission and declaration that it lawfully terminated lease pursuant to common law doctrines of impossibility and frustration of purpose because COVID-19 pandemic and Governor’s executive orders mandated business closure and stoppage of construction; landlord asserts breach of contract counterclaim on basis that that lease’s force majeure clause expressly carves out rent payment obligations; landlord seeks judgment on the pleadings; tenant argues that force majeure clause is inapplicable because pandemic is not an enumerated event and frustration/impossibility are separate doctrines.) (05/06/2020 Complaint; 06/24/2020 Answer and Counterclaims; 06/24/2020 Defendant’s Pre-Motion Letter to the Court Re: Judgment on the Pleadings; 07/01/2020 Plaintiff’s Pre-Motion Response Letter to Court re: Judgment on the Pleadings)

Banco Santander (Brasil), S.A. v. American Airlines, Inc., No. 20-cv-3098 (E.D.N.Y. 2020) (Plaintiff seeks declaration that it is entitled to terminate pursuant to force majeure clause that covers “act of God” and “act of government”) (07/10/2020 Complaint)

Southern District of New York (Excuse from contract performance; Excuse from payment obligation)

D’Amico Dry D.A.C. v. McInnis Cement Inc., No. 1:20-cv-03731-VEC (S.D.N.Y. 2020) (Shipping company alleges breach of contract against cement supplier and seeks maritime attachment of assets pending arbitration on the basis that supplier defaulted prior to COVID-19 and then invoked force majeure clause as a pretense to terminate; Court entered ex parte order of attachment and denied cement supplier’s motion to vacate same.) (05/14/2020 Complaint; 05/25/2020 Defendant’s Motion to Vacate the Process of Maritime Attachment; 06/03/2020 Plaintiff’s Opposition to Defendant’s Motion to Vacate the Process of Maritime Attachment; 06/30/2020 Opinion Order Denying Motion to Vacate the Process of Maritime Attachment)

E2W, LLC v. Kidzania Operations, S.A.R.L., No. 1:20-cv-02866-ALC (S.D.N.Y. 2020) (Franchisee invokes force majeure clause in franchise agreement, alleging that government shutdown orders excuse its payment obligations and obligation to open an additional franchise location; Court, without any reasoning, granted franchisee’s application and compelled the parties to maintain the status quo during the pendency of their arbitration; parties arbitrating claims in the ICC.) (04/06/2020 Complaint; 05/11/2020 Order Granting Preliminary Injunction; 05/22/2020 Answer)

The Gap, Inc. v. Ponte Gadea New York LLC, No. 1:20-cv-04541 (S.D.N.Y. 2020) (Tenant seeks, inter alia, rescission/cancellation of lease, arguing that COVID-19 crisis and civil orders constitute a “casualty” within the meaning of the force majeure clause causing a permanent abatement of rent and the lease to terminate; Landlord counterclaims alleging breach of contract and argues that COVID-19 and civil orders are not within the scope of the force majeure clause and that the force majeure clause does not excuse contractual rent payment obligation.) (06/12/2020 Complaint; 07/07/2020 Answer and Counterclaims)

Hunter Commc’ns., Inc. v. Panasonic Avionics Corp., No. 20-cv-03434 (S.D.N.Y. 2020) (Defendant asserts force majeure defense against breach of contract claim brought by satellite communications provider, alleging that COVID-19 excused payment obligations under master service agreement for satellite bandwidth capacity services.) (05/01/2020 Complaint; 06/26/2020 Answer)

JN Contemporary Art LLC v. Phillips Auctioneers, LLC, No. 1:20-cv-04370-DLC (S.D.N.Y. 2020) (Plaintiff seeks preliminary injunction preventing Defendant from invoking clause that allowed it to terminate consignment agreement if performance were delayed due to “circumstances beyond [the parties’] reasonable control,” and argues that Defendant’s decision to terminate was not caused by the pandemic but rather was the result of a deliberate business decision; Defendant argues that the pandemic is within the scope of the force majeure clause because it is a “natural disaster” and that performance is excused because the specific auction noted in the contract was postponed.) (06/09/2020 Complaint; 06/12/2020 Plaintiff’s Memorandum of Law in Support of Motion for Preliminary Injunction; 06/23/2020 Amended Complaint; 06/23/2020 Plaintiff’s Amended Memorandum of Law in Support of Motion for Preliminary Injunction; 07/02/2020 Defendant’s Memorandum in Opposition to Plaintiff’s Order to Show Cause for Preliminary Injunction and Temporary Restraining Order; 07/09/2020 Plaintiff’s Reply in Further Support of Motion for Preliminary Injunction)

Viamedia, Inc. v. WideOpenWest Finance, LLC, No. 1:20-cv-04064-VM (S.D.N.Y. 2020) (Plaintiff seeks preliminary injunction enjoining defendant from terminating television advertising management agreement, alleging that plaintiff’s late payments under agreement are excused based on “COVID-19 and the attendant economic crises prompted by government ordered lock downs and stay at home orders, which qualify as both acts of God and/or events beyond the reasonable ability of [plaintiff] to control.”) (05/27/2020 Plaintiff’s Memorandum of Law in Support of Motion for Preliminary Injunction; 06/19/2020 Amended Complaint; 06/22/2020 Order Denying Temporary Restraining Order and Preliminary Injunction)

Northern District of Texas (Excuse from refund obligation, Excuse from lease obligations)

W.L. Petrey Wholesale Co., Inc. v. V2 Incentives, LP, No. 20-cv-00447-A (N.D. Tex. 2020) (Plaintiff seeks refund of amounts paid to travel broker for corporate trip to Scotland; defendant asserts force majeure defense.) (05/19/2020 Amended Complaint); 06/16/2020 Answer; 06/22/2020 Order)

Hibbett Sporting Goods, Inc. v. Weatherford Dunhill LLC c/o Dunhill Prop. Mgmt. Services, Inc., No. 4:20-cv-00607-O (N.D. Tex. 2020) (Tenant seeks declaratory judgment that rental and payment obligations and any obligation to continuously operate within mall were excused while Governor’s order mandated closure of the mall.) (06/10/2020 Complaint)

Southern District of Texas (Excuse from transaction closing)

Khan v. Cinemex USA Real Estate Holdings, Inc., No. 4:20-cv-01178 (S.D. Tex. 2020) (Plaintiff seeks, inter alia, specific performance ordering defendant to close on cinema chain purchase transaction, arguing that defendant’s reasons for refusing to close that relate to COVID-19 are invalid because the contract was negotiated after the pandemic was declared and the Material Adverse Effect clause expressly excludes pandemics; case automatically stayed because defendant filed for chapter 11 bankruptcy.) (04/02/2020 Complaint; 06/01/2020 Order Staying the Case due to Defendant filing bankruptcy)

Eastern District of Virginia (Grounds for contract termination)

Sodexo Operations, LLC v. Va. Aquarium & Marine Sci. Ctr. Found., Inc., No. 2:20-cv-00309-AWA-RJK (E.D. Va. 2020) (Food services provider exercised right to terminate contract pursuant to “act of God” and “governmental policy” terms in force majeure clause and alleges defendant’s refusal to reimburse plaintiff for unamortized portion of capital investments is a breach of their contract.) (06/16/2020 Complaint)

STATE

Delaware (Excuse from transaction closing)

Forescout Technologies, Inc. v. Ferrari Grp. Holdings, L.P., No. 2020-0385 (Del. Ch. 2020) (Plaintiff/target asserts breach of contract and specific performance claims against defendant/buyer for failure to close merger deal worth $1.9 billion, on ground that COVID-19 does not constitute a Material Adverse Event permitting buyer’s termination of merger agreement; Buyer asserts declaratory judgment counterclaims that, inter alia, target’s financial troubles caused by COVID‑19 constitute a Material Adverse Event because, notwithstanding the explicit exclusion of “epidemics” and “pandemics” as Material Adverse Events, target’s financial troubles are disproportionate in comparison to other similar companies and therefore fall within the “materially disproportionate adverse effect” savings clause; trial is scheduled to start on July 20, because equitable relief will not be possible after August 6.) (05/19/2020 Complaint; 06/05/2020 Counterclaim; 07/14/2020 Letter Opinion re: Interlocutory Appeal)

Florida (Extension of closing date)

LFG Acquisitions, LLC v. CSPS Hotel Inc., No. 107048560 (Fla. Cir. Ct. Hillsborough Cty. 2020) (Plaintiff seeks to delay closing of real estate sale pursuant to force majeure provision in purchase agreement.) (05/05/2020 Complaint; 05/29/2020 Answer)

New York (Grounds for contract termination, Excuse from default)

Bath & Body Works, LLC vs. 304 PAS Owner LLC Successor, No. 651836/2020 (N.Y. Sup. Ct. N.Y. Cty. 2020) (Plaintiff seeks rescission of commercial property lease and declaration the lease is unenforceable because COVID-19 and related government mandated shutdowns frustrated the purposes of the lease. Defendant argues plaintiff tenant recognized that a variety of “force majeure” events might occur, including those forming the bases of plaintiff’s claims, but specifically agreed in a lease rider that such events would only permit delayed performance, not excuse payment of any monetary sums due under the lease and its supplemental rider.) (06/08/2020 Complaint; 06/29/2020 Answer and Counterclaims)

D2 Mark LLC v. OREI VI Investments LLC, No. 652259/2020 (N.Y. Sup. Ct. N.Y. Cty. 2020) (Hotel group sought, inter alia, to preliminarily enjoin junior creditor from foreclosing after hotel group missed one payment obligation due to COVID-19, arguing that loan agreement expressly excused defaults occurring “in connection with” a force majeure event; Court enjoined junior creditor from holding a sale before July 23 and ordered junior creditor to issue new, commercially reasonable notice of sale.) (06/06/2020 Complaint; 06/23/2020 Decision and Order on Plaintiff’s Order to Show Cause)

N888JK Ltd. v. Equiom (Isle of Man) Ltd., No. 652122/2020 (N.Y. Sup. Ct. N.Y. Cty. 2020) (Plaintiff seeks declaratory relief that it may keep a deposit paid pursuant to a used aircraft purchase agreement on the grounds that defendant unilaterally terminated the agreement; defendant asserted COVID-19 as a force majeure event permitting termination and demanded return of deposit.) (05/28/2020 Complaint; 06/16/2020 Stipulation to Extend Time to Answer)

Victoria’s Secret Stores, vs. Herald Square Owner LLC, No. 651833/2020 (N.Y. Sup. Ct. N.Y. Cty. 2020) (Plaintiff seeks to annul commercial property lease under doctrines of frustration of purpose and impossibility resulting from COVID-19 and related government mandated shutdowns. Defendant argues the lease explicitly allocated the risk of plaintiff tenant being unable to occupy the premises in the absence of a force majeure clause in the lease.) (06/08/2020 Complaint; 06/29/2020 Answer and Counterclaims; 06/29/2020 Defendant’s Memorandum of Law in Support of Motion for Summary Judgment)

For more information, please reach out to your regular Pillsbury contact or the authors of this client alert.

Pillsbury is closely monitoring and analyzing the global legal, economic, policy and industry impacts of COVID-19. For our latest insights, visit our COVID-19 and Economic Impact Resource Center.

^{1.  This client alert was created with assistance from Pillsbury Summer Associate Eugenie Dubin.}