By Brett Krantz & Lyndsay Ross
In the wake of COVID-19 and its economic difficulties, “force majeure” has become an often-heard legal phrase as a way to obtain potential relief from current contractual obligations. But can force majeure really have that effect in commercial contracts in Ohio? As with many legal questions, the answer is “maybe.”
I. Force Majeure – General Principles
As noted in a previous article, “force majeure” is a French legal term that is used to describe an event that cannot be anticipated or controlled. Force majeure can be a defense to a breach of contract claim; however, it is not so simple as relying upon the unfavorable economic climate. For force majeure to be applicable, the particular event preventing an individual from fulfilling his contractual obligations typically must be spelled out in the language of the contract.
The natural next question is, how specifically must the contract spell out each event that could prevent a person from upholding his end of the bargain? Rather than an exhaustive list, many force majeure clauses rely upon a “catch-all” phrase, purporting to excuse the signer so long as “other similar events” to what is included in the contact language occur.
However, a party to a contract should understand the limits of a catchall phrase. Courts across the country take different approaches: for example, such phrases are interpreted very narrowly in New York, where the excusing event must be similar to the events expressly enumerated in the contract. In contrast, Florida courts employ a more liberal approach and may enforce a force majeure provision even when the intervening event is unforeseeable and dissimilar to those in the contract.
II. Force Majeure in Ohio Case Law
As late as 2016, force majeure has been characterized as “a relatively new concept in Ohio law.” However, the cases that have discussed catch-all provisions seem to indicate that Ohio courts may follow the narrower approach, like New York.
In a 2016 case from the Ohio 7th District Court of Appeals (Haverhill Glen, LLC v. Eric Petroleum Corp.), the court found that a force majeure clause was applicable to excuse obligations in an oil and gas lease. The property surface owner was prevented from gaining access to the property, and the clause in question stated that the party would not be in breach where “drilling, reworking, production or other operations are prevented or delayed by inability to obtain necessary access or easements, or by any other cause not reasonably within [his] control.” Because the property surface owner was prevented from gaining access to the site and later prevented from drilling, the court found the situation to be one the force majeure catch-all provision intended to cover. However, it appears the court found it to be so because the event that actually occurred was similar to the events specifically enumerated in the force majeure clause. The court stated that the property surface owner had “the right to rely upon the language contained therein to protect [his] investment.”
III. Illinois’ Recent Interpretation of Force Majeure
This narrower approach may be supported by a recent case from an Illinois Bankruptcy Court, specifically dealing with contractual obligations in the wake of COVID-19. In In re Hitz Restaurant Group, No. 20 B 05012 (N.D. Ill. Bankr. June 3, 2020), the court relied on a force majeure clause to partially excuse rent obligations during COVID-19.
Here, a restaurant group failed to pay rent owed to property owners under a lease after July 2019. The property owners moved to evict the group in January 2020, and the group filed for bankruptcy at the end of February. While the parties engaged in motion practice, COVID became a local issue. By the time the property owned moved the court to order the group to pay rent due as of its bankruptcy filing, all Illinois restaurants and bars were closed for on-premises consumption.
The group raised the force majeure clause in the lease in defense. The force majeure provision was broad and excused performance where “obligations are prevented or delayed, retarded or hindered by…governmental action or inaction, orders of the government or civil or military authorities, or any other cause, whether similar to dissimilar to the foregoing, not within reasonable control of the party or its agents, contractors, or employees…Lack of money shall not be grounds for Force Majeure.”
The court agreed, finding that the clause “unambiguously applies.” Illinois law requires that the triggering event be specifically stated in the plain contractual language to apply force majeure. The court found that the Illinois Governor’s Orders shutting down on-premises consumption for bars and restaurants was “governmental action” and an “order of the government” that “hindered” the restaurant group from fulfilling its obligations. The court did, however, limit its holding to revenue lost because patrons could no longer dine in, and the group was responsible for pro-rated rent payable by funds that could be generated through carryout and delivery services.
While this opinion did provide immense relief to the restaurant group, it’s worth noting that the court did so because the issue was framed to be squarely within the more-specific contract language. Rather than claiming that COVID-19 was a “similar or dissimilar” event “not within reasonable control of the party,” obligations were excused due to the effect of government stay-at-home orders.
IV. What To Do Going Forward
While the two cases have their differences, a reasonable interpretation of the rationales could indicate that courts are not adverse to providing considerable relief under force majeure, but only if the event is specifically listed in the force majeure clause, or similar enough that it is reasonable that a catch-all provision was intended include it.
In light of these cases, parties to a contract should: (1) look at their current contracts and determine whether they may potentially require a renegotiation of the force majeure provision, and (2) before executing new contracts, think about the language used in the catch-all provision and whether the language says exactly what is intended.
Going forward, parties should take precautions before invoking a force majeure clause. The more similar the situation is to one specifically described in the clause, the more likely a court will be to enforce a force majeure provision. To discuss whether a force majeure clause in your contract may be applicable, or to receive more information, contact Brett Krantz (bk@kjk.com), Lyndsay Ross (lmr@kjk.com), or any member of our Litigation team.