Takeaway

A party who chooses to omit a force majeure clause from a contract runs the risk of being precluded from invoking, or limited in their ability to invoke, the common law excuse doctrines of impossibility and frustration of purpose.

The Absence of a Force Majeure Clause
In common law jurisdictions, force majeure is a creature of contract, meaning that the doctrine cannot be invoked absent an express provision authorizing the parties to do so. Other excuse doctrines, however, exist at the common law—namely impossibility and frustration of purpose. The former doctrine is triggered by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made. The latter doctrine is available when a party’s principal purpose is substantially frustrated without its fault by such a contingency, even if performance remains possible.

When considering the doctrines of impossibility and frustration of purpose, courts often consider the language in the contract to assess whether the event preventing performance (or, in the case of frustration of purpose, the event that defeated the purpose of the contract) justifies the common-law excuse. This raises the question: if parties expressly decide not to include a force majeure clause in a contract, will courts read into that decision an intent to prevent reliance on similar doctrines that exist at common law?

The answer, at least during the COVID-19 pandemic, remains unclear, but it is certainly an argument that litigants have been making. In Victoria’s Secret Stores v. Herald Square Owner LLC, No. 651833/2020 (N.Y. Sup. Ct. N.Y. Cty. 2020), for example, a commercial tenant seeks to annul its lease on the basis that COVID-19 and the government shutdown orders rendered performance impossible and frustrated the purpose of the lease. The landlord has moved for pre-discovery summary judgment in part on the basis that the lease does not contain a force majeure clause. Because “an essential element of the common law concepts of frustration and impossibility is whether there is a contractual allocation of risk,” the defendant argues that “the existence of a contractual allocation supplants and therefore precludes application of the ‘common law’ doctrines.” Here, according to the defendant, the decision not to include a force majeure clause evidenced that the parties allocated the risk of a shutdown order to plaintiff. Dkt. 44 at 4.

A Presence of a Force Majeure Clause that Expressly Excludes Certain Obligations
Alternatively, if a contract does contain a force majeure clause, but that clause expressly excludes certain obligations from the protections afforded by clause, can a party use the common law doctrines to excuse nonperformance of the excluded obligations? Historically, the answer has generally been “no.” See, e.g., S. Coll. St., LLC v. Charlotte Sch. of Law, LLC, No. 18 CVS 787, 2018 WL 3830008, at *5 (N.C. Super. Aug. 10, 2018) (“The fact that the Lease expressly excepts CSL’s rent payment obligation from the protections of the force majeure clause precludes CSL’s argument that it is somehow excused from paying rent because it lost its license to operate a law school” under doctrine of frustration of purpose).

And in the COVID-19 context, this is certainly an argument that parties are making. In Bath & Body Works, LLC v. 304 PAS Owner LLC Successor, No. 651836/2020 (Sup. Ct. N.Y. Cty. 2020), for example, a commercial tenant sought, among other things, rescission of its lease based on the doctrines of impossibility and frustration of purpose. According to the landlord’s counterclaim for nonpayment of rent, the lease contains a force majeure clause that expressly carves out rent obligations from the relief afforded by the force majeure clause. The lease also expressly recognized the possibility of a government order relating to property use, and said that such governmental order would not abate the tenant’s rent payment obligations. Based on this contractual language, the defendant landlord alleges that the tenant is not entitled to rely on impossibility or frustration of purpose to excuse its rent obligations.

In light of judicial precedent and emerging caselaw on the impossibility and frustration of purpose doctrines, businesses should consider the potential ramifications of, and challenges to, invoking (or defending against the invocation of) these common law excuse doctrines when deciding whether or not to include a force majeure clause (and the scope of that clause) in their contracts.

Developing COVID-19 Force Majeure Case Law

(updates since the last issue in bold below)

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; Case dismissed on July 21, 2020.) (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 here.)

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; Case voluntarily dismissed on July 13, 2020.) (04/27/2020 Complaint; 07/13/2020 Letter Motion by Plaintiff Informing Court of Settlement; 07/13/2020 Notice of Voluntary Dismissal with Prejudice)

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; counterclaims and answer amended on other grounds.) (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; 07/23/2020 Amended Counterclaims; 08/06/2020 Answer to Amended Counterclaims)

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; Tenant answers with general denials of landlord’s allegations regarding the force majeure clause and asserts affirmative defenses on other grounds; Tenant seeks stay pending decision by multidistrict litigation panel to consolidate this and 32 other substantively similar actions pending against Tenant in federal district courts.) (06/12/2020 Complaint; 07/07/2020 Answer and Counterclaims; 07/28/2020 Answer to Counterclaim; 08/11/2020 Plaintiff’s Motion to Stay Pending Decision by Multidistrict Litigation Panel to Accept Transfer of Federal Court Actions)

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; Plaintiff argues that force majeure defense should be stricken because Defendant did not allege that payment breaches were result of COVID-19; Defendant file notice of intent to file amended answer.) (05/01/2020 Complaint; 06/26/2020 Answer; 07/17/2020 Plaintiff’s Letter Motion; 07/22/2020 Defendant’s Letter Reply)

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; Court denied mandatory injunction; Plaintiff amended complaint on other grounds.) (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; 07/15/2020 Order Denying Temporary Restraining Order and Preliminary Injunction; 07/31/2020 Plaintiff’s Second Amended Complaint)

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”; Court denied preliminary injunctive relief.) (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, arguing that force majeure clause requiring refund was triggered by government lockdowns and decrees that made trip impossible; Defendant argues affirmative defenses of repudiation, material breach, and failure to mitigate.) (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; Landlord moves for dismissal on procedural grounds.) (06/10/2020 Complaint; 07/20/2020 Motion to Dismiss)

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 v. 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; 08/03/2020 So-Ordered Stipulation Discontinuing the Action with Prejudice)

Iluka Resources Limited v. Chemours International Operations Sarl, et al., 653398/2020 (N.Y. Sup. Ct. N.Y. Cty. 2020) (Supplier seeks, inter alia, breach of contract damages and declaratory relief, arguing that the COVID-19 pandemic is not among the specified force majeure “events” and did not actually prevent buyer from accepting and paying for shipments of materials.)  (08/06/2020 Complaint)

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 asserts 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; 07/22/2020 Answer with Counterclaims)

Roslyn Events Corp. v. Ber Dur Realty Corp., No. 607968/2020 (N.Y. Sup. Ct. Nassau Cty. 2020) (Tenant seeks declaratory relief and to enjoin landlord from holding tenant in default of commercial lease, arguing that COVID-19 pandemic and New York City regulations triggered the force majeure clause and excused rent payment obligations.) (08/05/2020 Complaint; 08/05/2020 Order to Show Cause)

Simpson Thacher & Barlett LLP v. VBGO 425 Lexington LLC, No. 653415/2020 (N.Y. Sup. Ct. N.Y. Cty. 2020) (Plaintiff/tenant seeks a declaration that it is entitled to rent abatement under Force Majeure provision of commercial lease, alleging that it was forced to vacate its premises for a period of sixty (60) days due to a government order and a “national or other public emergency”) (07/27/2020 Complaint)

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; Defendant seeks summary judgment on the same grounds; Plaintiff opposes summary judgment, arguing that the absence of a force majeure clause does not preclude frustration of purpose and impossibility excuses; Defendant argues in further support of summary judgment that the lease allocated risk for this type of harm, and the precise cause of harm is irrelevant.) (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; 07/29/2020 Plaintiffs’ Memorandum of Law in Opposition to Motion for Summary Judgment; 08/13/2020 Defendant’s Reply Memorandum of Law in Further Support of Defendant’s Motion for Summary Judgment)

Valentino U.S.A., Inc. v. 693 Fifth Owner LLC, No. 652605/2020 (N.Y. Sup. Ct. N.Y. Cty. 2020) (Plaintiff/tenant seeks a declaration that the lease of its commercial property has been frustrated by the COVID-19 pandemic and related Executive Orders, and in the alternative, seeks a declaration that its performance under the lease agreement has been rendered impossible; Defendant/landlord seeks dismissal of the Complaint on the grounds that the lease agreement contains a clause allocating the risk of closure to the plaintiff/tenant in the event of “unavoidable delays”, defined to include “restrictive governmental laws or regulations ... acts of God ... or other reason of a similar or dissimilar nature.”) (06/21/2020 Summons and Complaint; 07/27/2020 Defendant’s Memorandum of Law in Support of Motion to Dismiss)

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


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