Associations, Nonprofits and Political Organizations Report - Summer 2020
Date: August 13, 2020
Interpreting Force Majeure in the Era of COVID-19
By: Mark Franco and Grant W. Shea*
COVID-19’s impact on the meetings held by organizations is unlike anything ever seen before. Not only are attendees less likely to show up to events given the potential health risks, but numerous state and local governments have limited the number of people who can socially gather in one place and implemented other measures not conducive to meetings, such as social distancing and mandatory masks. The significant risks to the health and safety of attendees have caused organizations to question whether meetings and events where people gather in person, a long-time pillar for nonprofit, tax exempt organizations, should take place. As a result, organizations are considering whether to cancel or reschedule already booked events and how they could do so without incurring substantial damages that may arise from the cancellation provisions in contracts for hotels, convention space and ancillary services and events.
Fortunately, courts have traditionally allowed parties to terminate contracts without penalty where an “Act of God” or some other action prevents performance by either of the parties, also known by the term “force majeure.” In addition, many contracts contain provisions known as “force majeure clauses.” Black’s Law Dictionary defines a force majeure clause as “a contractual provision allocating the risk if performance becomes impossible or impracticable as a result of an event or effect that the parties could not have anticipated or controlled.” OWBR LLC v. Clear Channel Communs., Inc., 266 F. Supp. 2d 1214 (D. Haw. 2003) (quoting Black’s Law Dictionary 657 (7th ed. 1999)).
It is common for parties to include force majeure clauses in contracts to delineate events that may excuse or suspend their contractual obligations. For example, if a contract’s force majeure clause is available due to the occurrence of a “government action,” “war,” “acts of terrorism,” “national emergency,” or “natural disaster,” the parties’ contractual obligations are excused or suspended if the event may prevent performance in the future.
Because it is impossible to list every intended contingency that may trigger a force majeure clause in a contract, parties will often rely on “catch-all language” such as “Acts of God” and “other causes beyond the parties’ control” in an effort to broaden the clause’s applicability. Some force majeure clauses may also differentiate how a contingency may impact a party’s performance. Some clauses will excuse or suspend contractual obligations if performance is “commercially impracticable or inadvisable,” while others excuse or suspend contractual obligations if performance is “illegal or impossible.” The broader the language in the force majeure clause, the more likely the party wishing to cancel a meeting may be able to do so. For example, a circumstance causing an event to be “illegal” or “impossible” will be interpreted more narrowly than a circumstance which causes the event to be “commercially impractical.”
Historically, courts have interpreted the language contained within force majeure clauses quite strictly. For example, in 2003, the District Court of Hawaii held that the terrorist attacks of September 11, 2001, did not trigger a force majeure clause that included the words “war” and “terrorism” because the event in question was to take place in February 2002. The court explained that “had the . . . event been scheduled for the weeks immediately following September 11, [the defendants’] argument that holding the convention was ‘inadvisable’ would be much stronger,” but because the event was scheduled in February, the proximate cause of the event’s inadvisability was the subjective mood of the American consumer, not “war” or “terrorism”. See OWBR LLC v. Clear Channel Communs., Inc., 266 F. Supp. 2d 1214 (D. Haw. 2003). In 2015, the District Court of Minnesota interpreted “government action” narrowly when it stated, “[N]umerous courts have declined to apply a force majeure clause where governmental action affects the profitability of a contract, but does not preclude a party’s performance.” United Sugars Corp. v. U.S. Sugar Co., No. 13-1485(DSD/BRT), 2015 U.S. Dist. LEXIS 43573, at *9 (D. Minn. Apr. 2, 2015).
Courts have also interpreted catch-all provisions within force majeure clauses narrowly because of their capacity for misuse. In 2006, the Court of Appeals for the District of Columbia relied on the concept of ejusdem generis or “of the same kind” to hold that catch-all language stating “any other emergencies beyond the parties’ control” did not contemplate the inability to reschedule a meeting due to conflicts with other events. See National Ass’n of Postmasters of U.S. v. Hyatt Regency Washington, 894 A.2d 471, 476 (D.C 2006). In 2001, the Central District Court of California held that while explicitly stated qualifying provisions within force majeure clauses can be triggered by both foreseeable and unforeseeable events, catch-all provisions can only be triggered by unforeseeable events. See Watson Laboratories, Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d 1099, 1111 (C.D. Cal. 2001) (holding force majeure clause of supply agreement did not encompass Food and Drug Administration shutdown of manufacturing plant because shutdown was foreseeable and not explicitly addressed in the provision).
Despite the fact that courts have historically interpreted force majeure clauses narrowly, there are examples of courts applying them to the circumstances presented by the COVID-19 pandemic. In June 2020, the Bankruptcy Court for the Northern District of Illinois held that a force majeure clause that included the words “governmental action or inaction” was “unambiguously triggered by . . . Governor Pritzker’s executive order” prohibiting on-premises consumption of food and beverages at restaurants. In re Hitz Restaurant Group, No. 20 B 05012, 2020 WL 2924523 *1, at *2 (Bankr. N.D. Ill. June 3, 2020). The court found that the executive order was “the proximate cause of [the debtor’s] inability to pay rent, at least in part, because it prevented [the debtor] from operating normally and restricted its business to take-out, curbside pick-up, and delivery.” Id. As a result, the court held that the force majeure clause excused partial performance and that the debtor (a restaurant operator) was only required to pay 25% of its rent for the months of April, May, and June. Id. at *3. In April 2020, the Civil Court for the City of New York wrote in a footnote that the CARES Act was written “to redress the decimation of our economy by force majeure of Coronavirus Pandemic of 2020.” One Wythe LLC v. Elevations Urban Landscape Design Inc., No. LT-77696-19/KI, slip op. at 14 (N.Y. Civ. Ct. Apr. 17, 2020). The court’s characterization of the coronavirus pandemic as “force majeure” could be one of the first of many decisions where the courts will treat the coronavirus pandemic as triggering force majeure clauses in contracts.
Going forward, organizations that enter into agreements to hold meetings and events should consider possible continuing limitations on gatherings, social distancing requirements, and mask recommendations or requirements. As such, they must decide how to shape force majeure clauses to cover COVID-19 or similar viruses or diseases as a specific force majeure triggering event, to address the possibility that courts may begin to view future disruptions caused by a virus or disease as foreseeable and therefore not covered by a catch-all provision. If parties entering into a contract wish to include a catch-all provision in the applicable force majeure clause, the catch-all provision should contain language that circumvents the concept of ejusdem generis, such as: “…or any other events or circumstances not within the reasonable control of the party affected, whether similar or dissimilar to any of the foregoing.” Finally, parties should set the standard of severity that triggers force majeure clauses to “commercially impracticable” or “inadvisable” as opposed to or in addition to “illegal” or “impossible.” This may help the organization in the event that circumstances related to COVID-19 have eased, but concern for community spread and certain mitigation measures remain.
*Summer intern, 2020
WHITEFORD'S COVID-19 RESOURCE PAGE
Our attorneys at Whiteford are actively advising clients across a wide range of industries on the legal and regulatory implications of COVID-19, and preparing guidance on key legal issues. Navigate to our COVID-19 resource page for helpful alerts categorized by industries through the hyperlink below.
GUIDANCE & RESOURCES
Are YOU Ready for Your PPP Forgiveness Application?
The following article by colleagues David Cahn and Jordan Halle in our Business and Corporate section provides insight into this process.
Latest PPP Regulations Allow Early Forgiveness Application
Associations Creating Community Podcasts - Globally
Our most recent publication was a culmination of several podcast interviews that added to the preexisting series, Associations Creating Community. This time, we added a global component. These interviews with association professionals were recorded live at the ASAE Great Ideas conference in Salt Lake City in March 2020. This batch of podcasts was hosted by Kellie Newton and Dorothy Deng of Whiteford, and Blake Althen of Human Factor (podcast provider). Navigate to the podcast article by selecting the hyperlinked title.
Recent Publications
On 8/12, at the ASAE Virtual Annual Meeting, Eileen Johnson and Jennifer Jackman presented, "2020 Compensable Time Provisions: Do I Get Paid for That?"
If you registered for the ASAE meeting, you can use your login credentials anytime through August 31, 2020 to access the program. In this informative session, Eileen and Jen addressed the following issues:
• How can you tell when an employee is “at work” or on their own time?
• How do you handle breaks?
• When it’s all-hands-on-deck time at the annual conference, can you require your employees to “volunteer” their time?
• Have you properly classified your employees and independent contractors?
• Is California AB5 a trend for other states?
On 8/6, Mark Franco and Lenora Knapp, President of Knapp & Associates International, Inc., presented a webinar on “Managing Your Certification Program During the COVID Era and Beyond: Part 1 - Understanding Your Future Candidate Pipeline.” The presentation, the first installment in a 3-part series, shared insights on how to maintain a pipeline in the “new” normal, find and attract new audiences for credentials and craft an action plan to strengthen and expand your candidate pipeline. Check out the full recording of the webinar here.
Announcements
Whiteford partner Jim Kahl discusses the top 5 compliance tips for association PACs in an article recently published by the National Association of Surety Bond Producers. The article discusses the key rules associations and their PACs must understand to avoid common missteps and possible Federal Election Commission penalties. The article also highlights opportunities for growing an association’s PAC and furthering the public policy goals of the association and its members
On 3/5, Dorothy Deng co-presented a webinar: “GDPR Overview & Implementation Recommendations for US-based Nonprofits and Associations”, which was hosted by the ASAE Technology Advisory Council. The webinar provided an overview of the EU General Data Protection Regulation (“GDPR”) framework and how it relates to nonprofits and associations based in the U.S. To learn more about GDPR requirements, responsibilities, and best data privacy practices, check out the full recording of the webinar here.