Tour de Force: Do the Current Economic Conditions Caused by COVID-19 Constitute a Force Majeure Event?

• Travel Wizard v. Clipper Cruise Lines, No. 06-cv-2074(GEL), 2007 WL 29232, at *5 n.3 (S.D.N.Y. Jan. 3, 2007) (post-9/11 economic downturn did not excuse performance of payment obligations that had become economically impractical, notwithstanding that the downturn was itself the result of a force majeure event);
• Elavon Inc. v. Wachovia Bank, Nat’l Ass’n, 841 F. Supp. 2d 1298, 1307-08 (N.D. Ga. 2011) (“[t]he economic downturn in 2008 and the subsequent events that followed do not constitute a force majeure which excused Defendants’ performance of their obligations under the [contract].”);
• Flathead-Mich. I LLC v. Penninsula Dev. L.L.C., No. 09-14043, 2011 WL 940048, at *5 (E.D. Mich. Mar. 16, 2011) (rejecting force majeure defense of debtor in default of a loan during 2008 economic crisis because the force majeure defense is “inapplicable to financial hardships”); and
• Route 6 Outparcels LLC v. Ruby Tuesday Inc., 88 A.D.3d 1224, 1226 (3d Dep’t 2011) (rejecting argument that 2008 recession excused performance of payment obligations because force majeure clause limited its application to unforeseeable events and holding that “economic factors are an inherent part of all sophisticated business transactions and, as such, while not predictable, are never completely unforeseeable; indeed, financial hardship is not grounds for avoiding performance under a contract.”).

Is the Current Recession Different?

In the wake of COVID-19, many courts are likely to be confronted once again with the question of whether sudden economic hardship constitutes a force majeure event. In E2W LLC v. Kidzania Operations S.A.R.L., No. 1:20-cv-02866-ALC (S.D.N.Y. 2020), for example, the plaintiff-franchisee had agreed to open and operate at least ten franchises in the United States by specific dates. The plaintiff was dependent on third-party financing to fulfill its obligations and, when its lender backed out due to COVID-19 and plaintiff failed to open franchises by the contractually required dates, the defendant-franchisor issued a default notice and purported to terminate. The franchisee filed suit, seeking an injunction pending arbitration to prevent the defendant from terminating, arguing that the force majeure clause excused nonperformance because the deficiency in performance was due to “acts of God” and “governmental orders.” On May 11, 2020, the Court issued an order, without an opinion, granting the franchisee’s application and compelling the parties to maintain the status quo during the pendency of their arbitration.

E2W is not likely to be the last time courts will grapple with whether a force majeure clause excuses nonperformance caused by the economic fallout of the pandemic, as opposed to the pandemic itself. Such cases involve multiple complex issues, including:

• whether the clause is limited to unforeseeable events and, if so, whether an economic downturn is unforeseeable;
• whether, in the case of payment obligations, the deficiency in performance was truly beyond the party’s control or merely the product of a calculated business decision to allocate funds elsewhere; and
• whether performance is truly impossible or has merely become more expensive than envisioned at the time of contracting.

While the E2W summary order granting the injunction in aid of arbitration did not provide the court’s reasoning, plaintiff’s characterization of its nonperformance resulting from “acts of God” and “governmental orders” directly related to COVID-19, rather than the subsequent severe economic conditions that followed, may have factored into the court’s decision. The unprecedented scope of COVID-19 containment measures employed by government authorities may provide the necessary causal link between this severe economic downturn and nonperformance that many courts found absent in cases arising from the post-9/11 and 2008 economic downturns.

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; 05/5/2020 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)

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 in our prior issue of Tour de Force here)

Southern District of New York (Excuse from payment obligation)

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.) (04/06/2020 Complaint; 05/11/2020 Order)

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)

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)

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.) (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)

Eastern District of New York (Excuse from transaction closing)

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)

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.) (06/19/2020 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.) (05/19/2020 Complaint; 06/05/2020 Counterclaim)

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)

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 )

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)

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)

Pillsbury’s experienced, multidisciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.