When COVID-19 began its swift spread in the winter of 2019 and on a more global scale in the early spring of 2020, it did not take long for the term “force majeure” to dominate discussions, especially within the hospitality industry. Who could have predicted its extensive global economic impact? Think about the massive shutdowns, closures, and the global halt of tourism—if those in the hospitality industry were not familiar with the term “force majeure” prior to the COVID-19 pandemic, they certainly were after.
What is Force Majeure?
The term “Force Majeure” means superior or greater force. It is a concept typically captured in contracts to address unforeseeable circumstances out of the contracting parties’ control that materially impacts a party’s ability to fulfill its obligations under the contract. Many may have also heard this referred to as an “act of God.” Force majeure is reserved for circumstances so unusual, unforeseeable, extraordinary, unavoidable, or unpreventable, the occurrence of which ought to excuse the contracting party’s failure to fulfill or delay its performance of its contractual obligations. Some circumstances commonly classified as force majeure events are wars, strikes, major natural disasters such as earthquakes, and terrorist acts.
A client calls to ask, “given the COVID-19 pandemic, can I use force majeure to excuse my contractual obligation?” Some may initially think the answer is “yes”, but the answer truly depends on a number of factors, some of which will be discussed further in this article.
When to use a Force Majeure Right Under a Contract?
Depending on the force majeure clause in the contract, exercising a force majeure right can either (1) temporarily delay a party’s performance until such circumstance ceases or performance becomes possible, or (2) permanently excuse a party’s performance obligation under a contract. Before a force majeure right can be exercised, it is also typical for force majeure clauses to contain provisions that require that the affected party (i) has its ability to exercise its obligations (other than payment obligations) be made impossible by such force majeure event, (ii) take reasonable steps to mitigate the effects of the force majeure event, and (iii) provide reasonable and timely notice to the counterparty. Also, force majeure clauses are typically drafted so that when the affected party claims an inability to perform its obligations under a contract, the other contracting party along with the affected party are both entitled, without liability (other than payment obligations), to suspend the performance of their duties under the contract while the force majeure event continues—which may be subject to other limitations.
Except for certain legislative and judicially coined restrictions governing the drafting of contracts (e.g., where the contract’s subject matter is against public policy), contracts are generally respected by courts and seen as powerful expressions of the mutual agreement between parties— the meeting of the minds. As such, courts look to the facts of the situation and the language of a force majeure provision when reaching their judgments. Courts tend to construe force majeure clauses narrowly, primarily because of their wielding power and the potential for abuse by contracting parties. The standard generally used by courts, depending on the jurisdiction, is the “impossibility” standard— and not a mere financial hardship, impracticability, or “frustration of purpose” (a separate legal standard that references unforeseen events that make the underlying purpose for a contract or transaction useless)1.
While jurisdictions may differ in their rules for interpreting a force majeure clause, some general factors that are typically considered in determining whether the “impossibility” of performance standard is met include: (1) the occurrence of an unforeseeable event so great that it destroys the ability of a party to perform its obligations or destroys the subject matter of the contract, (2) the risk of the occurrence of such event was not allocated in the contract or by common business practice, (3) the occurrence of such event is not arising from a fault of the contractual parties, (4) the event in question occurred after the contract was formed, and (5) the occurrence of the event rendered the performance by a contractual party commercially and objectively impossible2.
Given the court’s narrow interpretation, it is important when drafting a force majeure clause that parties do not simply rely on generic boilerplate language as courts can read these as too broad and subjective (e.g., the use of “act of God” which can have different subjective interpretations). Instead, force majeure clause drafters should include specific categories and examples, as the parties agree may impact their contractual obligations should such events occur.
COVID-19 and Force Majeure
The underlying principle of force majeure is unchanging. However, its interpretation can be ever-evolving as lawyers and businesses are presented with new unforeseen challenges hindering the performance of services or the delivery of goods as promised. The onset of the novel Coronavirus (COVID-19) and its global economic impacts has challenged countless businesses and lawyers to re-visit this concept on a global scale. Prior to the COVID-19 pandemic, many force majeure clauses did not list “pandemic” as an event that should be considered a force majeure event. This has led to countless litigations on whether the COVID-19 pandemic should be regarded as a force majeure event. The courts are still catching up with this “new” interpretation, and the verdict is still out on many COVID-19 related litigations. A creative and substantive reliance on COVID-19 for excusing a party’s contractual obligation does not rest solely in the fact that the world is in a pandemic, but instead, it rests more on the effects of the pandemic, such as governmental restrictions, shutdowns, and quarantine laws on the businesses. Needless to say contract drafters, following the impacts of COVID-19, have been swift to now include “pandemic” and other similar terms for reasons to excuse performance of a party in their force majeure clause language. Additionally, given COVID-19 may still be considered an ongoing force majeure event under some force majeure provisions, it has caused parties to consider, when drafting future force majeure clauses, whether there should be limitations on the length of a party’s excused performance due to a force majeure event.
Impact of COVID-19 on the Hospitality Industry: Is there hope?
The adverse impact of the COVID-19 pandemic on the hospitality industry is undeniable. The hospitality industry is a service-heavy industry that includes, but is not limited to, lodging, food and beverage services, traveling/transportation, event planning, theme parks, hotels, and restaurants. The effects of government travel restrictions, quarantining laws, socializing precautions, and an increase in unemployment, which in turn reduces consumer spending power, have all caused significant concerns for hospitality related businesses. These concerns have caused parties to review in greater detail the force majeure provisions in various hospitality related contracts including, without limitation, purchase and sale agreements, franchise agreements, hotel management agreements, service contracts and event planning contracts. Since the start of the COVID-19 pandemic, various lawsuits have arisen relating to the interpretation of the force majeure provisions in these agreements and whether a parties performance can be excused due to the effects of the pandemic. The outcome of whether a party’s performance can be excused due to force majeure depends largely on (i) the language of the force majeure provisions in the contract and (ii) the specific facts leading to the request for excuse/delay of performance.
Will the hospitality industry ever recover from COVID-19? While projections vary, the answer to this question arguably rests on the ability to safely get people to come out of their homes to travel, eat out, and simply socialize. One seeming solution rests on the efficacy, accessibility, reachability, and acceptance of the COVID-19 vaccine. The goal is really centered on the scientifically proven concept of herd immunity. Herd immunity is when a large population within a community is immune to a specific disease (in this case, COVID-19), and as such, the virus has nowhere else to go. The perceived hope from the hospitality industry is that the introduction of a widespread vaccine will increase travel, revitalize the economy and in turn, increase consumer spending power within the industry.
In conclusion, no one has all the answers, but there is, in fact, hope. With the increased number of individuals receiving the vaccine, there has been a notable decrease in governmental restrictions nationally and an increase in social gatherings in various communities. However, this positive trend should not lax the caution needed when drafting contracts as it relates to force majeure clauses. It is prudent for businesses and commercial contract drafters to ensure that a force majeure clause captures, to the extent possible, specific force majeure events to avoid unintended interpretations. Competent legal counsel should be sought for guidance while navigating the ever-evolving concept known as force majeure.
1Hemlock Semiconductor Operations, LLC v. SolarWorld Indus. Sachsen GmbH, 867 F.3d 692, 704 (6th Cir. 2017); see also, Liggett Rest. Grp., Inc. v. City of Pontiac, 260 Mich. App. 127, 676 N.W.2d 633, 637 (Mich. Ct. App. 2003); and Restatement 2d of Contracts § 265.
2 Great Lakes Gas Transmission Ltd. P’ship v. Essar Steel Minn., LLC, 871 F. Supp. 2d 843, 852, 856 (D. Minn. 2012); see also, Stein v. Paradigm Mirasol, Ltd. Liab. Co., 586 F.3d 849, 853 (11th Cir. 2009).
AUTHORS
Jennifer Shepler, Member
Jen Adams Shepler focuses her practice on corporate transactions with a significant focus on the hospitality industry. A substantial portion of her practice is devoted to representing hotel owners, developers, investors, and management companies. She assists with all aspects of acquisition and disposition for various hotel related assets and other commercial properties, including multifamily units and industrial sites. Jen has assisted with the negotiation of purchase and sale agreements and closing documents, management agreements, franchise agreements, comfort letters, technical services agreements, subordination of management agreements, and various other similar agreements. In addition, Jen negotiates and reviews a wide range of operational hotel-related agreements, including service agreements and group sales agreements, and is actively involved in assisting clients with financing acquisitions and refinancing of existing loans.
Abby Onaghise, Associate
Abby focuses her legal practice on corporate transactional matters within the hospitality industries. Abby represents hotels, hotel management companies, and multinational retail companies with a variety of contractual matters, including the negotiation and drafting of hotel management agreements, franchise agreements, consulting services agreements, licensing and marketing agreements, loan and other finance related agreements.
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