Is A Poorly Written Force Majeure Clause Worth The Ink?

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We’ve all seen, or perhaps been assaulted by, a surfeit of articles about force majeure clauses and how all of our agreements should include one. Other pundits have gotten way ahead of this one by explaining how we will have a better world if the advice to include such clauses would be taken by all. They’ve noted that very few agreements with a force majeure provision have covered the kind of closures we have experienced and are still experiencing. But, what we’ve not seen is much understanding that there is nothing special about a “force majeure” clause: it is no more than another risk-shifting device. What differentiates these provisions from co-tenancy or fire damage provisions is that force majeure clauses don’t know in advance how a particular risk will manifest itself. Even though some speak of “labor disputes,” “acts of G-d,” “public enemies,” etc., they invariably end with: “or other events beyond the control of a party” or some such. Without getting into the rules of contract interpretation, we’ll simply note that this teaches that these clauses are intended to relieve one party or the other of an obligation if something beyond the control of the obligated party prevents performance.

[Today, we’ll endeavor not to repeat an 8-year old blog posting: “How To Guard Against “Superior Forces” In Our Leases, Mortgages, And Other Contracts; No, This Isn’t Science Fiction. It’s Real Estate Law.” For those who “missed” it, it can be seen by clicking: HERE ]

At the beginning of this month, a Bankruptcy Court for the Northern District of Illinois published an opinion about one such force majeure clause in a restaurant lease. Consistent with the advice we are seeing from all corners of our industry, the clause (according to the court, and correctly so) covered the restaurant’s closing because of COVID-19 restrictions imposed by Illinois’ governor. Read the lease’s clause for yourself:

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.

In brief, the restaurant was in bankruptcy but was still operating. An order for relief was issued. As a result, the restaurant became obligated to abide by all of the terms of its lease from and after the day the order was issued. The first post-order rent payment was due on March 1, 2020 while restaurants still were permitted to operate without restrictions. On March 16, an executive order barring on-premises restaurant operations took effect. So, the question presented back to the Bankruptcy Court was whether the restaurant was “excused from performing its obligations or undertakings provided in this Lease” to pay rent?

You’ll have to read the relatively short decision for yourself to see the court’s full analysis by clicking: HERE if you choose to do so, but basically the court’s thinking was as follows.

The court looked at the cited text as consisting of two parts: (a) the conditions permitting excuse from an obligation; and (b) that lack of money was not an allowable excuse. It then opined that (a) was more specific than (b). Consequently, if there was a conflict between (a) and (b), the more specific – (a) – would prevail. Based on that analysis, the court ruled that the reason the rent couldn’t be paid was that the governmental action shutting down restaurants was the reason the tenant couldn’t pay its rent, not its “lack of money.” [Please don’t spin your head around that.] It rejected all arguments by the landlord that the tenant wasn’t limited to using money from the restaurant’s operations and that the tenant could have used outside funds such as from a Small Business Administration loan. The court’s belief that the parties had contemplated rent would be paid from the restaurant’s business operations was further evidenced by its ruling requiring 25% of the rent to be paid because the permitted operation of a “take-out” business made 25% of the restaurant’s floor area usable.

Ruminations, to say the least, is uncomfortable with the court’s conclusion, but we don’t get a say in the matter. Further, Bankruptcy Courts follow a public policy aimed at “saving” businesses for the benefit of creditors, and their decisions are often result-oriented. That isn’t to say that their decisions don’t influence the law, but only to say that the decisions may be written to shore up a desirable outcome that might not have been the case in a non-bankruptcy setting. But, that’s not the real problem here.

The real problem is that the lease’s force majeure provision is poorly written. To Ruminations, the lease’s force majeure provision is an example of the dreaded “uncertainty” caused by those who are better at typing or cutting and pasting than thinking.

If the deal was that the obligation to pay rent was never going to be excused or even delayed, then the lease should have said: “Rent will always be fully payable regardless of any of the foregoing excuses.” Or, define the excusing conditions as “Events of Force Majeure” and say “No Event of Force Majeure will excuse Tenant from its obligation to pay Rent or Additional Rent.”

Now, it is legitimate for the parties to agree that rent would be excused or more likely, delayed, but we’re not taking a stand either way. That’s a business deal, one that will be affected by the relative bargaining power of the parties on the day the lease is signed. Certainly, what was once seen by many as a “boilerplate” clause has now been elevated to the most important one in a lease. Those feelings will subside. But, for all who are now living through these times, the force majeure provision will never again fall again into obscurity.

We’re not going to offer a list of the events that could be designated as “beyond the control” of a party. Internet research will yield a much bigger list than we would be willing to offer. And, then, we’d feel obligated to discuss each possible event or how that event could be construed or misconstrued. We’ll leave that to others.

Instead, we’ll explain our understanding of what should be considered when crafting these clauses. First, the obligation to pay money (by either party, though the tenant has more such obligations) is very different from an obligation to do something or refrain from doing something. So, a well-formulated force majeure provision should address monetary obligations separately from all other ones. If an event of force majeure is not intended to affect monetary obligations, then say so: “No monetary obligation will be excused or delayed by reason of force majeure” or “If an event of force majeure prevents or hinder a party’s ability to satisfy a monetary obligation, then that obligation will be deferred until the impossibility or hindrance no longer exists.” Even if an event of force majeure doesn’t excuse or delay payment, parties need to consider if a bank holiday or moratorium should be a permissible delaying event.

Now, as to non-monetary obligations, do you intend to excuse the obligation or just delay its due date? In most cases of general application, parties only want to “delay” performance. A simple example is where a landlord or tenant has “X” number of days to complete construction. Assuming the parties agree that if completion is delayed by “forces” outside of a party’s control, the obligated party should not be penalized and the benefitted party will accept the risk of late delivery. That’s an example of what we mean when we characterize force majeure provisions as a “risk-transfer” device. There may be obligations that should be completely excused, but those would be rare and specific to a particular situation. Thus, we offer the following to be picked apart by our readers. Keep in mind, however, we aren’t offering it as a “model” provisions; we offer it for picking apart with the hope that those who make the effort to do so will be able to write their own based on what they have taught themselves in this exercise:

The time for the performance of any act required to be done by either Landlord or Tenant shall be extended by a period equal to any delay caused by Force Majeure.  As used herein, “Force Majeure” means a delay caused by reason of fire or other casualty, acts of G-d, war, terrorism, strikes, lockouts, unavailability of materials, failure of power, restrictive governmental laws or regulations, civil commotion or riots, insurrections, unforeseeable weather conditions, the act, failure to act or default of the other party, war or other reason, but only if the cause of the delay is beyond the control of the party whose performance of the affected obligation was delayed, but a party’s inability to satisfy a monetary obligation will never be delayed by reason of Force Majeure.

In a way, a force majeure provision sits in the same category as the words, “materially” and “substantially.” We use these and other words when we know there are things we can’t predict well enough to describe, and need to leave it to the time when the facts are on the table. Consequently, as we see it, force majeure provisions are useful, even necessary, “gap filler,” applicable when our limited ability to predict future events prevents us from allocating risk.

Those readers who want to share their thoughts about the provision above or about any force majeure-related topic, please feel free to do so. No offense will be taken.

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Comments

  1. Richard Doherty says:

    What is the collective view of the following Ken Adams (Adams on Drafting) approach?-Please note I am trying to capture the essence of his thinking not what he might draft in this particular circumstance.

    For purposes of this agreement, “Force Majeure Event” means, with respect to a party, any event or circumstance, whether or not foreseeable, that was not caused by that party ( add what is specifically excluded) and any consequences of that event or circumstance.

  2. Ira, your somewhat suggested paragraph makes it clearer that a tenant who lost all its customers due to a pandemic would still need to pay rent on time, AND that no matter what happens, payments due from either side to the other should not be affected/delayed by FM. Is that really what you believe that a well-crafted FM clause in this day and age should say? Yes, it’s a clearer FM provision, but it does nothing to address huge and unforeseen dropoffs in revenues due to events outside tenant’s controls (and I’m someone who represents more landlords than tenants).

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