By Michael C. Kelley of Shutts & Bowen LLP
Published September 25, 2020
Amid the unprecedented conditions that businesses have been forced to operate under, real estate and construction professionals in particular may be struggling to navigate pandemic related legal challenges in their markets. From executive orders issued at state and local levels, to exceptional circumstances applied to force majeure contract provisions, the confusion inspired by COVID-19 continues to plague businesses as case law develops in the court system.
However, after nearly six months of lock downs and government ordered closures, businesses uniquely hit by COVID-19 that were forced to shutter in-person services may finally have some answers from recent court decisions. Under certain conditions, COVID-19 Executive Orders may trigger a force majeure clause, excusing some contractual obligations.
FORCE MAJEURE AND TYPICAL INTERPRETATION
Force majeure is the basic doctrine that, in every business transaction, there is a possibility of extreme events beyond the control and fault of the impacted party, which events may arise and prevent such party from performing the contract. Typically, parties to commercial contracts will allocate such risk by including a force majeure clause in the agreement, which clause is intended to excuse performance if a force majeure event occurs. Such clauses typically list the types of events that qualify as force majeure, and also set out the parties’ obligations, required mitigation efforts, available remedies, termination rights, and the like, related thereto.
The interpretation of a force majeure claim is governed by state law. Courts will consider the specific agreement at issue and the claimed force majeure event on a case-by-case basis. There is no standard or uniform force majeure clause used by contracting parties that is consistently interpreted; nor is there a generally accepted method of interpretive analysis consistently applied by all courts. Every jurisdiction is different and unique. That, of course, presents significant risk in the reliability of any analysis related to the application of the force majeure doctrine, particularly during such unprecedented conditions.
Most courts look carefully at the language the parties agreed to and attempt to interpret whether the parties bargained for the type of relief being sought as a result of a claimed force majeure event. When asked to interpret whether performance has been hindered by a force majeure event, courts will analyze (1) whether the contract covers the event; and (2) whether that event actually prevented or delayed performance of the agreement. Courts are traditionally very conservative when interpreting a contract based on a claimed force majeure, and, normally, will strictly and narrowly construe the contract language accordingly. Importantly, the more specific force majeure language is, the more strictly it is likely to be construed.
Florida courts apply a standard legal dictionary definition of “force majeure” by looking for any contractual provision that allocates “the risk of loss if performance becomes impossible or impracticable, especially as the result of an event or effect that the parties could not have anticipated or controlled.” ARHC NVWELFL01, LLC v. Chatsworth at Wellington Green, LLC, 2019 WL 4694146, at *3 (S.D. Fla. Feb. 5, 2019).
Generally, Florida courts will narrowly construe such contract language and will only address what is specifically identified with regards to an event causing nonperformance (Chatsworth at *3 (citing authorities and providing history of force majeure law)). If a party lists government action as a force majeure event, they may need to specify the degree to which government action impacts a party's performance. Other decisions reflect that government action without express reference in the force majeure clause may not qualify as a force majeure event.
DEVELOPING CASE LAW
One of the first courts to tackle these issues is the U.S. Bankruptcy Court for the Northern District of Illinois in In re Hitz Restaurant Group in early June, concerning a Chicago-area restaurant’s claimed inability to pay rent due under its lease because of COVID-19 and the restaurant’s compliance with the Illinois governor’s executive orders restricting normal operation of restaurants.
Interpreting a force majeure clause in the lease related to performance being hindered by “laws, governmental action or inaction, orders of government,” the court held that the governor’s executive order triggered both the “governmental action” and “orders of government” provisions of the clause. The court also held that the executive order “was unquestionably the proximate cause of [the restaurant’s] inability to pay rent, at least in part, because it prevented [it] from operating normally and restricted its business….” The court allowed a 75% rent abatement based on the percentage of the restaurant’s square footage rendered unusable by the executive order. The court also rejected all of the landlord’s arguments that one would have expected to have been persuasive in applying the force majeure clause more strictly (and in the landlord’s favor). One reason for this could be the uniqueness of the particular force majeure clause being interpreted; but another reason could be that judges recognize this COVID-19 situation is unique.
It is difficult to take one case and apply the reasoning broadly across the country, particularly a case out of an Illinois Federal Bankruptcy Court and attempt to predict what courts in Florida might do. The Hitz ruling is specific to the facts of the case, which would be difficult to replicate, and would likely not be a guide for other landlord-tenant disputes arising from the pandemic. Thus, ongoing research as other cases develop and are decided will be critical. However, the Hitz case could represent the beginning of a trend of courts stretching the traditional parameters of force majeure / frustration of purposes analyses to provide some relief to those negatively impacted by this unprecedented global pandemic. If nothing else, it supports the argument that compliance with local County executive orders may be the proximate cause of a business’s inability to operate normally, and thus not a failure to operate or conduct a substantial portion of the business (depending upon how those concepts are defined in the particular underlying agreement).
As we continue to monitor disputes arising from the pandemic, it will be imperative to follow cases like this one to see how courts across the nation navigate these issues.
Michael C. Kelley is an attorney in the Orlando office of Shutts & Bowen LLP, where he is a member of the Construction Litigation Practice Group. Michael’s practice focuses on construction, commercial and real property litigation, as well as transactional matters involving construction projects and the acquisition, development, financing, operation, and disposition of real estate. He counsels businesses that develop, own, build, occupy and invest in real estate or construction projects, helping them to make better, more profitable decisions and preserve longstanding relationships and economic value. Michael helps his clients anticipate, prepare for and defend against litigation proactively, or when a dispute must be resolved, utilize litigation efficiently and effectively. He represents clients in the construction and real estate industries, including corporations, builders, developers, designers and high-end investors in a broad range of litigation and transactional matters. He can be reached at MKelley@shutts.com or at (407) 832-6792. For more insight on issues affecting the construction and real estate industries, visit Michael’s YouTube Channel.