As you might recall, in an article back at the beginning of the Covid-19 pandemic (which somehow feels both like it was a couple of weeks ago and a couple of decades ago), we suggested that one beneficial course of action while quarantining would be to try to anticipate legal issues that will arise over the coming months and years as a result of the pandemic. What issues did you think of?
We have already seen some of those legal issues in the form of lawsuits filed around the country seeking to limit or do away with governmental stay-at-home orders and restrictions on occupancy and mask requirements. The stay of evictions has helped many tenants unable to pay their rent, while placing some landlords in an equally difficult bind with their mortgage holders or leaving them unable to sell their property while a non-paying tenant remains in place.
Another issue that is becoming more prevalent is the applicability of force majeure clauses to the Covid-19 pandemic. Could a force majeure clause cover delay or cancellation due to the pandemic? Courts are beginning to address this issue and the answer, so far, is yes. In JN Contemporary Art LLC v. Phillips Auctioneers LLC, 20CV4370 (DLC), 2020 WL 7405262 (S.D.N.Y. Dec. 16, 2020), the Court held that the term “natural disaster” in a force majeure clause included the pandemic. The case stemmed from contracts governing the auction of two works of art, one of which was to occur in New York in May 2020. The contract included a guaranteed minimum of $5,000,000 from the sale of the painting, subject to any applicable withdrawal or termination provision. Id. at *2. The termination provision stated:In the event that the auction is postponed for circumstances beyond our or your reasonable control, including, without limitation, as a result of natural disaster, fire, flood, general strike, war, armed conflict, terrorist attack or nuclear or chemical contamination, we may terminate this Agreement with immediate effect. In such event, our obligation to make payment of the Guaranteed Minimum shall be null and void…Id. On March 14, 2020, as a result of the Covid-19 pandemic, the defendant auctioneer announced it was postponing its auctions until June 2020. Id. at *3. On June 1, 2020, however, defendant transmitted a letter to plaintiff stating that it was invoking its right to terminate the contract and asserting that the obligation to make the Guaranteed Payment was null and void. Id. at *4. But on July 2, 2020, the defendant held a virtual auction. Id.
After taking judicial notice of state and federal official proclamations and actions related to the pandemic, the Court dismissed the plaintiff’s claims, holding in relevant part:The COVID-19 pandemic and the attendant government-imposed restrictions on business operations permitted Phillips to invoke the Termination Provision. The pandemic and the regulations that accompanied it fall squarely under the ambit of Paragraph 12(a)’s force majeure clause. That clause is triggered when the auction “is postponed for circumstances beyond our or your reasonable control.” Paragraph 12(a) also provides examples of circumstances beyond the parties’ reasonable control. Those circumstances include “without limitation” a “natural disaster.” It cannot be seriously disputed that the COVID-19 pandemic is a natural disaster. One need look no further than the common meaning of the words natural disaster. Black’s Law Dictionary defines “natural” as “[b]rought about by nature as opposed to artificial means,” and “disaster” as “[a] calamity; a catastrophic emergency.” Natural, Disaster, Black’s Law Dictionary (11th ed. 2019). The Oxford English Dictionary likewise defines a “natural disaster” as “[a] natural event that causes great damage or loss of life such as a flood, earthquake, or hurricane.” By any measure, the COVID-19 pandemic fits those definitions.Id. at *7. [Emphasis added; footnotes omitted]; also see Easom v. US Well Services, Inc., CV H-20-2995, 2021 WL 520712, at *7 (S.D. Tex. Feb. 10, 2021) (“COVID-19 also qualifies as a “natural” disaster…”). As of this writing, courts in Florida have declined to determine the applicability of a force majeure clause to the Covid-19 pandemic on a motion to dismiss, holding that it is a factual question that is inappropriate at that pleading stage. Palm Springs Mile Associates, Ltd. v. Kirkland’s Stores, Inc., 20-21724-CIV, 2020 WL 5411353 at *2 (S.D. Fla. Sept. 9, 2020); Gibson v. Lynn Univ., Inc., 20-CIV-81173-RAR, 2020 WL 7024463, at *4 (S.D. Fla. Nov. 29, 2020). However, this does not mean that the issue has not been addressed at all. In IN RE: CINEMEX USA REAL ESTATE HOLDINGS, INC, et al., Debtors. Additional Party Names: CB Theater Experience LLC, Cinemex Holdings USA, Inc., Cobb Lakeside, LLC, Lessee & Cobb Lakeside, LLC, 20-14695-BKC-LMI, 2021 WL 564486, at *5 (Bankr. S.D. Fla. Jan. 27, 2021), the Court found after final hearing that a movie theater was excused from paying rent until pandemic restrictions were lifted and it was allowed to reopen based upon the force majeure clause of the lease.
Although the general trend seems to be that force majeure provisions can be applicable to the pandemic, that is by no means a guarantee it will apply to every contract that is breached during the pandemic. Questions that will remain to be answered include: Does the subject matter of the contract make a difference – an art auction is certainly non-essential, as noted by the Court. What about the construction of a building? Does it matter if the construction is indoors (where transmission of the virus is riskier) or outdoors (where the risk is smaller)? What about the delivery of goods? Would it make a difference if the goods being delivered are N-95 masks or Halloween masks? What if the state government has lifted restrictions but the costs for the business to operate safely remain prohibitive? What other legal issues will arise as a result of the pandemic? We should all keep thinking!
Authored by: Krista L. B. Collins