Force Majeure Clauses, Bankruptcy, and Covid-19

July 14, 2020

By: Christopher A. McNulty, Allison E. Raley

Category: Bankruptcy, Restructuring & Creditor-Debtor Rights, Coronavirus (COVID-19)

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COVID-19 has forced many businesses to temporarily close and absorb unforeseen significant profit losses based on governmental executive orders. Motivated by the pandemic’s economic fallout and the influx of bankruptcy filings, bankruptcy courts are now looking to equitable remedies, such as force majeure clauses, when issuing rulings.[1] A force majeure clause is a “contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.”[2] The allowed relief is a matter of contractual interpretation and rests in the drafting of the clause and a fact intensive analysis by the court.[3]

In In re Hitz, a Landlord sought to enforce Hitz Restaurant Group’s (“Debtor”) obligation to pay post-petition rent under 11 U.S.C. § 365(d)(3).[4] Debtor asserted that its obligation to pay post-petition rent was excused by the lease's force majeure clause.[5] The Court, as an initial matter, determined that § 365(d)(3), which requires a debtor to timely perform all obligations under a lease of nonresidential real property that arise from and after the order for relief, would ordinarily require full payment of all rent due after the petition date. [6] However, Debtor argued— and the Court agreed— the force majeure clause was triggered on March 16, 2020 by the Illinois Governor ordering all restaurants to suspend on-premises food consumption.[7] The lease's force majeure clause provided in relevant part: “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.”[8]

The Court ultimately concluded that the force majeure clause unambiguously excused at least a portion of the rental payments due after March 16, 2020.[9] The Court used the force majeure clause contained in the contract and Illinois law to determine the clause would excuse performance because the triggering event was the proximate cause of the party’s nonperformance.[10] The Court then explained that: (1) the Governor’s order unquestionably constitutes both “governmental action” and issuance of an “order” as contemplated by the language of the clause; (2) the order unquestionably “hindered” Debtor's ability to perform by prohibiting Debtor from offering “on-premises” consumption of food and beverages; and (3) the order was unquestionably the proximate cause of Debtor's inability to pay rent, at least in part, because it restricted Debtor’s business to take-out, pick-up, and delivery only.[11] Debtor's obligation to pay rent was reduced in proportion to its ability to generate revenue through take-out, pick-up, and delivery services as allowed in the Governor’s order.[12] The Court determined Debtor owed Landlord 25% of each missed rent payment based on Debtor’s concession that 25% of the restaurant’s square footage could have been used for take-out, pick-up, and delivery services.[13]

Deciding what relief to extend to parties under a force majeure clause is a fact specific inquiry. It requires courts to interpret each force majeure clause in light of each state’s contract interpretation precedent, the unforeseen circumstances that triggered the clause, the scope of the specific force majeure clause at issue, and the general fairness of the remedy as it impacts each of the parties.

[1] See In re Hitz Rest. Grp., No. BR 20 B 05012, 2020 WL 2924523 (Bankr. N.D. Ill. June 3, 2020).

[2] Force Majeure Clause Definition, Black’s Law Dictionary (9th ed. 2009), available at Westlaw.

[3] See id.

[4] In re Hitz Rest. Grp., No. BR 20 B 05012, 2020 WL 2924523, at *1 (Bankr. N.D. Ill. June 3, 2020).

[5] Id. at *2.

[6] See, Id. at *1. (emphasis added).

[7] Id. at *2; See, Ill. Exec. Order 2020-7 § 1.

[8] Id. at *2.

[9] Id. at *2.

[10] Id. at *2 (emphasis added).

[11] In re Hitz at *2.

[12] Id. at *3. Significant to the Court’s holding was the Governor’s order did not prohibit all restaurant operations in Illinois; the order permitted take-out, pick-up, and delivery services. Id.

[13] Id. at *4.

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