The Writers Strike, Contract Law, & the Force Majeure Clause
INTRODUCTION
In 2020, force majeure clauses, once considered a mere formality tucked away in the fine print of contracts, took center stage as the COVID-19 pandemic and government-imposed shutdowns wreaked havoc on commercial agreements. Suddenly, what seemed improbable became a harsh reality, and the importance of having a competent attorney, a well-drafted contract, and informed parties came into sharp focus.
As we fast forward to 2023, another industry-wide strike, this time involving writers and actors, has brought force majeure clauses back to the forefront of legal discussions. This situation prompted many individuals to question if they could escape their contractual obligations due to the strike's impact. For some, their lack of initial legal counsel and hasty, uninformed contract signings led to seeking a remedy now.
The significance of the force majeure clause lies not only in its newfound relevance but also in the lessons it imparts. What once seemed like an improbable list of potential disasters now demands careful consideration and foresight when drafting and interpreting commercial agreements. The early case law emerging from the pandemic-driven litigations offers invaluable insights into how these clauses can protect parties during unforeseen disruptions.
In this article, we delve into the recent uptick on force majeure discussions due to the the pandemic & entertainment industry strikes, examine the role of force majeure clauses in addressing such upheavals, and highlight the importance of having skilled legal representation and well-crafted contracts to navigate the complexities of unexpected events. I think attorneys and industry professionals can learn valuable lessons from lthese experiences.
Force majeure (from French: 'overwhelming force', lit. 'superior force') is a common clause in contracts which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties (i.e. 'an act of god'). In other words, a force majeure clause plays a critical role in allocating the risk of loss when unforeseen events hinder, delay, or prevent contractual performance beyond the parties' control or anticipation. Acting as a contractual defense, its scope and impact depend on the specific terms negotiated in the contract, though often these terms are boilerplate.
A typical boilerplate force majeure clause might resemble the following (although variations can have significant implications, as discussed herein):
"Neither party shall be held liable or considered in breach of this Agreement for failure or delay in fulfilling any obligation under this Agreement caused by events beyond the reasonable control of the affected party, including, but not limited to, fire, floods, embargoes, war, acts of war, insurrections, riots, strikes, lockouts, other labor disturbances, or acts of God. However, the affected party shall make reasonable commercial efforts to mitigate the impact of such events and resume performance with reasonable dispatch once such events are resolved. Both parties shall promptly notify each other of any delays or failures resulting from force majeure."
However, an inadequately considered force majeure clause can lead to unfavorable outcomes, as courts interpret the clause as a reflection of the risk allocation the parties intended. To avoid potential pitfalls, thoughtful consideration of general and specific risks and their effects on the parties is essential.
A comprehensive force majeure clause should consist of four key components:
Each component carries its own set of considerations, demanding careful attention and diligence from contracting parties. By thoughtfully addressing these aspects, parties can create a force majeure clause that provides fair protection and addresses the uncertainties arising from unforeseen events, ensuring smoother contract management even in times of unexpected disruptions.
The Promisor’s Failure of Performance
The force majeure clause is defined by the breach for which a promisor seeks exoneration due to an unforeseen and calamitous event. However, it is often disregarded as parties tend to focus on defining the force majeure event itself. Within a contract, the parties can mutually agree that force majeure will excuse a default, delay, or failure to meet specific conditions. The scope of the force majeure clause can vary, encompassing a broad description of performance failure or a more precise delineation. It may apply to excuse the performance of either one party, both parties, or just one party involved.
When engaging in the process of contract drafting or review, it is essential to contemplate the potential breaches that could arise due to unforeseen and catastrophic circumstances, which might prompt your client's non-compliance. Once identified, it becomes crucial to ensure that the force majeure clause adequately covers such scenarios. Failing to do so may leave your client in a disadvantaged position if the hypothetical future breach falls outside the contract's defined scope of force majeure excusability. Therefore, precise and thoughtful drafting is essential to avoid unfavorable outcomes.
In a recent tuition refund case, a student sued his university, claiming that it breached a contract to provide in-person learning after COVID-19 caused the school to turn to remote learning. The force majeure clause said “[t]here will be no refund of tuition . . . in the event the operation of the University is suspended at any time as a result of [a force majeure event].” The university’s motion to dismiss was denied: the clause did not apply because the school’s alleged breach was not “suspend[ing] its operation” but rather offering an alternative mode of teaching. Gibson v. Lynn University, No. 20-cv-81173 (S.D. Fla. Nov. 29, 2020). (The court was troubled by the fact that the university would have won a Fed. R. Civ. P. 12(b)(6) dismissal if it had simply shut down rather than “try to provide some continuity for its students through remote learning,” and suggested that it might reconsider on a fuller record).
Sometimes, a particular type of breach is carved out of a force majeure clause. This is seen most frequently in commercial leases, which often carve-out the tenant’s inability to pay rent and other fees. The court almost always honors this carve-out, acknowledging that the parties have agreed that the risk of non-payment remains with the tenant, even in the face of an unanticipated calamity and enforce it. See, e.g., In re CEC Entertainment, Inc., No. 20-33163 (Bankr. S.D. Tex. Dec. 14, 2020) (enforcing an exclusion from the force majeure clauses of multiple Chuck E. Cheese restaurant leases for tenant’s “inability to pay any sum of money”). One recent restaurant lease case displayed an interesting though decidedly minority interpretation. Although the lease in In re Hitz Restaurant, 616 B.R. 374 (Bankr. N.D. Ill. 2020), stated, “Lack of money shall not be grounds for Force Majeure” (id. at 377), the court ruled that because the restaurant’s inability to pay was directly due to “government restrictions,” a listed force majeure event, it would trump the quoted provision on lack of funds (which could result from many causes). Id. at 377–378.
The Force Majeure Event
It is necessary and good drafting when the force majeure clause actually describes the unforeseeable events that excuse the breaching party.?
Generally, the definitions for this “force majeure event” begin with words like, “unanticipated events beyond the parties’ control, such as . . .” and then tack on a long list of examples. Or they start with a long list of calamities and follow up with a catch-all, like “and such other events as are outside the parties’ control.” Occasionally, a contract will simply provide a list, long or short, of potential force majeure events, although this approach seems inconsistent with the presumption that the parties are grappling with the unforeseeable when negotiating a force majeure clause. It is far less risky to include some language to cover the truly unanticipated development.
To provide a contemporary example, what if the list doesn’t include the word “pandemic?” A recent case in the Southern District of New York provides a good example of how a court decides whether and how the parties intended, at the time of contracting, to allocate the risk that a pandemic might delay, hinder, or prevent contract performance. In JN Contemporary Art LLC v. Phillips Auctioneers LLC, No. 20-cv-4370 (S.D.N.Y. Dec. 16, 2020), the court noted:
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Taking these together, the court ruled that the pandemic did qualify as a force majeure event in the contract before it.
Another contract interpretation tool is an examination of the “four corners” of a contract. Because the purpose of force majeure is to allocate the risk of the unforeseeable, a court will likely not find something that the parties appear to have considered to be a force majeure event. When drafting a contract, this warrants paying attention to internal consistency. For instance, in Zhao v. CIEE, Inc., No. 2:20-cv-00240-LEW (D. Me. Aug. 31, 2020), the court noted that while the contract for a foreign study program, interrupted by COVID-19, broadly provided for refunds in the event of program cancellation, it also included a liability waiver providing the company would not be liable for any loss or damage arising inter alia from “epidemic.” The plaintiff student received no refund for the program cancellation because the risk of epidemic was specifically foreseen and allocated in a different contract provision.
Trade usage and commercial practice are also interpretative tools an attorney must take into account when drafting or considering a force majeure clause: If the allocation of risk your client prefers is counter to prevailing commercial practice, it is important to lay it out clearly. In AB Stable VIII LLC v. Maps Hotels Resorts One LLC, Case No. 2020-3130-JTL (Del. Ch. Nov. 30, 2020), dealing with a “material adverse effects” provision in an acquisition agreement, dueling experts provided extensive testimony about what the word calamities customarily meant in such a document and whether it should be deemed to include a pandemic. Similarly, under the UCC, trade usage must be considered when construing a contract for the sale of goods. See UCC §2-615 comment 8 (whether a party has assumed the risk of an unforeseen event “is to be found not only in the expressed terms of the contract but in the circumstances surrounding the contracting, in trade usage and the like,” including whether they are “among the business risks which are fairly to be regarded as part of the dickered terms, either consciously or as a matter of reasonable, commercial interpretation from the circumstances.”).
Causation in Force Majeure Cases
In force majeure cases, the causal connection between the failure of performance and the force majeure event is a crucial aspect explicitly addressed within the force majeure clause. When drafting such clauses, there exists some flexibility in expressing the level of direct causation required. Phrases like "caused by," "due to," or "as a result of" are likely to imply a need for proximate cause, while the use of "solely caused by" places a higher, potentially insurmountable burden on the breaching party. It is essential to carefully consider the chosen language to avoid ambiguity or unintended consequences.
Notably, courts have generally not delved deeply into the specific cause of a party's losses when interpreting force majeure clauses in reported cases. Whether it was the pandemic itself, governmental shutdowns, or general economic downturns that caused a promisor's inability to perform has not been the primary focus. This distinction becomes significant because it has made the common law principles of impossibility and frustration of purpose less favorable to parties during the past year. Courts, especially in commercial centers like New York, have declared that financial difficulty or economic hardship, even if triggered by unforeseen events like COVID-19, will not excuse contract performance under these theories (see, e.g., Lantino v. Clay LLC, No. 1:18-cv-12247, S.D.N.Y. May 8, 2020).
A fascinating perspective on causation was demonstrated in the case of In re Hitz Restaurant Group, discussed earlier. In this instance, the tenant restaurant invoked the lease's force majeure clause, which included "governmental action" as a force majeure event. The court observed that the Illinois shutdown order specifically prohibited on-premises dining but allowed takeout and delivery. As a result, the court ordered the tenant's rent obligations to be reduced proportionally to reflect the portion of its revenues earned from on-premises dining.
Understanding the nuances of causation in force majeure cases is critical for both parties involved. A well-drafted clause should carefully define the level of causation required, while parties navigating the effects of a force majeure event must be prepared to demonstrate the direct link between the event and their inability to perform. By considering these factors, parties can better position themselves to assert their rights or defenses effectively and navigate the complexities that arise during unforeseen disruptions.
Scope of Relief in the Force Majeure Clause
One of the critical aspects of a force majeure clause is its determination of the scope of relief that a party is entitled to if their performance is excused due to a force majeure event. When analyzing a commercial contract, it is vital to consider whether the relief provided by the force majeure clause aligns with your client's anticipated needs should such an unforeseen event occur. This includes crafting precise language that clearly outlines the actions to be taken once the force majeure event concludes.
A potential pitfall arises when a force majeure clause broadly excuses all future performance by either party. A case that exemplifies this is NetOne, Inc. v. Panache Destination Management, Inc., No. 20-cv-00150-DKW-WRP (D. Hawaii June 5, 2020). In this instance, the pandemic was deemed a force majeure event, relieving both parties of future performance under the contract. However, the party that had booked a live event at a resort had already made a substantial deposit and had nearly completed its performance, while the resort had only done preparatory work but had not hosted the event. When the booking party sought to recover its deposit, the claim was dismissed as the force majeure clause explicitly absolved both parties of future obligations without addressing the return of deposits.
Another example of sweeping relief granted to a breaching promisor with one-sided consequences is found in the JN Contemporary Art case. The auction house agreed to auction a painting with a minimum sales price guarantee. The force majeure clause provided that the agreement could be terminated if the auction was postponed due to a force majeure event, nullifying the obligation to make payment of the guaranteed minimum and releasing the auction house from further liability. When the auction was postponed due to COVID-19, the auction house waited two months before invoking the force majeure clause to terminate the contract. The painting's owner argued that the auction house should have conducted the auction online instead, but the force majeure clause protected the auction house, leading to an unfortunate result for the owner.
In such cases, questions arise regarding whether these outcomes violate the implied covenant of good faith and fair dealing or merely reflect a wisely negotiated allocation of risk. As demonstrated in the JN Contemporary Art case, a one-sided force majeure clause can be detrimental to one party, emphasizing the importance of careful attention during contract negotiations.
Additionally, a well-drafted force majeure clause should include a notice provision, as it could have significantly impacted the outcome for the painting's owner. A notice provision would have required the auction house to decide whether to terminate the contract at the time of the auction's cancellation, rather than having the option to auction the painting during the COVID-19 period.
In conclusion, the scope of relief provided in a force majeure clause plays a pivotal role in contract management during unforeseen events. By crafting clear and balanced language, parties can better protect their interests and ensure a fair allocation of risks, thus preventing potential disputes and undesirable consequences.
The Entertainment Industry Strikes
As we have witnessed through the pandemic and the recent writers' and actors' strike, the importance of this clause cannot be overstated.
While proving impossibility and frustration in contract disputes presents substantial challenges, the force majeure clause offers parties the opportunity to thoughtfully allocate risk in their agreements. It enables them to craft a rational and tailored response to unpredictable circumstances. In an ideal scenario where parties possess equal bargaining power and diligently scrutinize every aspect of the contract, including the seemingly insignificant "boilerplate" provisions, the force majeure clause empowers them to choose a resolution that best suits their unique circumstances.
Though unequal bargaining power, as seen in some landlord-friendly force majeure clauses, may limit our control over certain aspects of negotiations, we can still take proactive steps. By paying close attention to force majeure clauses during contract drafting and revision, we can challenge one-sided articulations of force majeure rights and potentially mitigate unfavorable outcomes witnessed in past cases.
Moreover, the lessons learned from the COVID-19 era (and the forward-looking attorneys seeing similar issues abound due to the strikes) emphasize the significance of carefully interpreting existing force majeure clauses.
In conclusion, the force majeure clause is a powerful tool that allows parties to navigate the complexities of an ever-changing business landscape. By leveraging its potential and paying attention to the fine print, we can better protect our interests, mitigate risks, and forge more equitable and resilient commercial agreements. As we move forward, let us embrace these lessons and continue to adapt our contracts to meet the challenges of an unpredictable future.