Force Majeure Contract Provisions (Contrasting Court Opinions)

By Donald L. Swanson

A business contract will often have a “force majeure” provision, which excuses a party from performing under the contract when performance is prevented by unforeseen circumstances.

Force majeure provisions, while commonly included in business contracts, rarely take effect and are rarely even relevant—until now.  What’s changed, of course, is the pandemic.  Now, everyone with a contract dispute is focusing on the contract’s force majeure clause and asking whether and how it might apply.

What follows is a summary of two contrasting federal court opinions on force majeure clauses:

1. one opinion holds that the force majeure clause excuses performance; and
2. the other holds that it does not.

What distinguishes between these two contrasting opinions is this basic rule of contract law:

• In interpreting any force majeure provision, courts must construe contracts as they are written.

First Opinion—Force Majeure Relief is Granted

The First opinion is In re Hitz Restaurant Group, Case No. 20-B-05012 in the Northern Illinois Bankruptcy Court (Doc. 48, decided June 3, 2020).

The bankruptcy Debtor had leased real estate from Landlord. 

After Debtor files bankruptcy, Landlord asks the Court to “order Debtor to immediately pay post-petition rent in the amount of $31,473.86 and to timely perform all future rent obligations.”

Debtor responds by focusing on the lease’s force majeure clause, which provides:

• “Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by. . . laws, governmental action or inaction, orders of government . . . Lack of money shall not be grounds for Force Majeure.”

Then, Debtor argues that the force majeure clause is triggered by an executive order issued by the Illinois Governor, which says:

• “all businesses in the State of Illinois that offer food or beverages for on-premises consumption . . . must suspend service for and may not permit on-premises consumption. Such businesses are permitted and encouraged to serve food and beverages so that they may be consumed off-premises . . . through means such as in-house delivery, third-party delivery, drive-through, and curbside pick-up . . . [with] adequate social distancing.”

The Bankruptcy Court rules:

1. Because the March lease payment became fully due and payable two weeks before the executive order became effective, March rent must be paid in full; but
2. The force majeure clause unambiguously applies, at least in part, to the rental payments which became due thereafter.

In determining that the executive order “unambiguously” triggers the lease’s force majeure clause, the Court finds that the executive order “is the proximate cause of nonperformance.”  Here’s how:

• The executive order is a “governmental action,” and the issuance of such an “order” is contemplated by the language of the lease’s force majeure clause;
• The executive order unquestionably “hindered” Debtor’s ability to perform by prohibiting Debtor from offering “on-premises” consumption of food and beverages; and
• The executive order “unquestionably” caused Debtor’s inability to pay rent, at least in part, because it prevented Debtor from operating normally and restricted its business to take-out, curbside pickup, and delivery.

Landlord raises the following three arguments on why the lease’s force majeure clause should have no effect—all of which the Court rejects.

1. First argument.  The executive order did not trigger the lease’s force majeure clause because the order did not shut down the banking system or post offices in Illinois; therefore, Debtor could still write and send rent checks to Landlord. The Court rejects this argument “out of hand.”
2. Second argument.  Lender characterizes Debtor’s failure to perform as arising merely from a “lack of money,” which problem is an excluded event under the lease’s force majeure clause. The Court rejects this argument because Debtor contends that the executive order, not “lack of money,” is the proximate cause of an inability to pay rent.
3. Third argument.  Debtor could have obtained money to pay the rent, despite the executive order, by applying to receive a Small Business Administration loan—which Debtor failed to do.  The Court rejects this argument because there is no language in the lease or in any case law to support it.

The Court finds that the lease’s force majeure clause only “partially” excuses Debtor’s obligation to pay rent for April, May, and June 2020.  Here’s why:

• Since the executive order allows and encourages Debtor to perform carry-out, curbside pick-up, and delivery services, Debtor’s rent payment obligation is reduced only “in proportion to its reduced ability to generate revenue” because of the executive order; and
• Debtor estimates that 75% of the square footage of the restaurant, consisting of its dining room and bar, was rendered unusable by the executive order, while the remaining 25%, consisting of the restaurant’s kitchen, could have been used for carry-out, curbside pick-up, and delivery purposes.

Accordingly, the Court quantifies the rent reduction as follows:

• “Debtor owes at least 25% of the rental payments for April, May, and June 2020” after “application of the force majeure clause”; and
• “Monthly rental payments due thereafter are likely to increase as the government’s shut-down restrictions are gradually lifted.”

Second Opinion—Force Majeure Relief is Denied

The second opinion is CMA CGM S.A. v. Leader Int’l Express Corp., Case No. 2:19-cv-357 in the U.S. District Court for Eastern Virginia (Doc. 25, decided July 22, 2020).

The case involves a maritime service contract between Leader and CMA, under which CMA would ship cargo for Leader, with Leader to pay for shipping and guarantee a minimum quantity of containers to ship.

The contract includes a force majeure provision that:

• Includes “strikes, lock-outs or exceptional circumstances arising from the threat thereof, acts of God, state or public enemy, including . . . any unforeseen event beyond the control of the parties . . . which materially affect business of trading conditions and/or the supply or demand for the services of Carrier or the cargo of the Shipper”;
• Requires the affected party to “notify the other party in writing within seven (7) working days of the existence of such circumstances, specifying the effect of those circumstances on the party’s ability to perform its obligations”; and
• Excuses CMA from responsibility from any delay or expense “in the event the carrier is prevented by U.S. Customs or any other government entity from unloading some or all of the cargo on a particular vessel” that is not due to any act or omission or fault of CMA, and places all extra charges and expenses incurred as a result thereof on the account of Leader.

Here’s what happened:

On September 15, 2016, the United States Customs and Border Protection, in connection with a criminal investigation, held and detained the containers Leader arranged to ship with CMA but prohibited CMA from notifying Leader of the hold until after the containers were delivered to the terminal.

On September 19, 2016, CMA issued a notice to Leader regarding the hold on containers already booked and released.

CMA subsequently issued two other notices to Leader on October 3,2016. From September 19, 2016 to January 9,2017, CMA sent Leader at least 20 additional notices and booking sheets addressing the custom holds placed on containers booked by Leader.

Leader did not issue the force majeure notice required to seek relief under the service contract.

Eventually, 49 containers were shipped, and Leader paid the freight and other charges. The remaining 54 containers that Leader booked with CMA were seized and then released empty to CMA.  Then, CMA sues Leader, seeking $1,310,139.68 in damages for the 54 containers.

Leader answers with affirmative defenses including force majeure.

The Court declares that the contract’s force majeure clause does not excuse performance.  Here’s why:

• In interpreting any force majeure provision, courts must construe contracts as they are written, and where a force majeure provision is clear and unambiguous, the provision will be enforced—this includes any enforcement of notice provisions that the parties agreed to.
• Here, Leader did not issue the notice required by the contract because it did not become aware of the force majeure event until after the items were officially seized, so the Court does not base its decision on the notice requirement.
• Instead, the Court determines that the contract, (i) allocated risks for any governmental or custom interference between CMA and Leader within the force majeure clause, and (ii) does not consider governmental or custom interference as a force majeure event.
• Since Leader  agreed to assume the risks associated with any customs delay, the force majeure provision is inapplicable.

Conclusion

The two contrasting opinions discussed above reveal:

• Force majeure provisions vary dramatically from contract to contract; and
• Each force majeure provision must be construed like any other contract provision and given effect—or not—according to the specific language and facts of each contract and each case.

 ** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.