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What the First Ripples of Force Majeure Lawsuits Can Teach Us About the Expected Flood to Come

Client Updates

It’s now been almost two months since local spread of COVID-19 was first observed in the United States.  Within days, the CDC warned against mass gatherings in the United States, the President declared a national emergency, and municipalities began ordering residents to “shelter in place” to help stem the virus’s spread.  And companies were confronted with the impact these events would have on their ability to meet their contractual obligations (and the ability of their counterparties to do the same).  The concepts of force majeure and impossibility are nothing new.  But the current crisis has led to an unprecedented ubiquity in their potential application tied to one event.  Every company, big or small, in every industry and sector, no matter where located, is likely to use or hear the term “force majeure” in dealing with its counterparties.  A flood of related litigation is likely to follow.  The first wave of these lawsuits is already coming in and can be informative in understanding how companies are approaching these issues and what other companies may soon be facing.

A number of companies have already invoked contractual force majeure provisions in order to excuse performance, resulting in lawsuits.  A few of these actions have been affirmatively brought by the party invoking force majeure:  In one case, a franchisor terminated its agreement in response to a franchisee’s failure to perform.  This prompted the franchisee to file the lawsuit, arguing that its performance is excused under the force majeure provision without resulting in termination of the agreement.  Another plaintiff sued to recover deposits paid for a cancelled conference, invoking the force majeure provision of the parties’ agreement.

However, most of these cases explicitly raising force majeure have been brought by plaintiffs seeking to enforce the terms of the contract against defendants who invoked contractual force majeure provisions.  In most of these cases, plaintiffs—frequently characterizing the defendant’s invocation of force majeure or impossibility as a “pretext”—are requesting equitable relief: either declaratory relief (that force majeure does not apply and the defendant violated the agreement) or injunctive relief (requiring the defendant to comply with the terms of the contract notwithstanding force majeure provisions), or both.

In one dueling set of claims involving a derailed agreement to purchase a specialty retail brand, both the buyer and seller have filed actions.  They seek opposing declaratory judgments on the question of whether shuttering the brands’ stores due to the pandemic was a material adverse event permitting the buyer to terminate.  Neither disagrees that the spread of the virus required the temporary shuttering of most of the brands’ stores, but the parties are at odds as to whether that event—and related actions by the seller in connection with the store closings—constituted a breach of the seller’s covenants under the deal, triggering a material adverse effect termination right.  The agreement was signed in February, when all parties were aware of the growing worldwide COVID-19 spread and potential effects to retail operations, but they dispute who bore the risk of those effects.

Breach of contract is, not surprisingly, the primary substantive claim in these suits, though we are also seeing assertions of unjust enrichment and breach of the duty of good faith and fair dealing.  It also is not surprising that in many of these early-filed cases the plaintiff is seeking equitable relief, as plaintiffs in need of such relief may be more likely to file suit quickly.  We expect requests for equitable relief to continue to play a role in later-filed force majeure litigation, but decreasingly so, with cases focusing on recovery of incurred damages more likely to be filed after parties’ individual situations have further developed.   

In addition to these suits explicitly invoking force majeure, a number of actions have been filed over companies’ actions during the crisis where force majeure or impossibility are likely to be invoked as a defense.  For example, suits seeking to recover costs paid for events that have been cancelled, and class action lawsuits filed to recover membership fees that are no longer useable.  Many of these have been brought against gyms or fitness studios that have continued to charge membership fees, even though facilities have been closed.  Others have been brought against airlines, cruise lines, or other organizations selling tickets to events.  One recent case may highlight whether index-based contracts are susceptible to force majeure disputes due to market volatility.  The availability of force majeure or impossibility as a defense in any individual case will depend on the language of the pertinent contract and the jurisdiction, but these cases are worth paying attention to.

We’ll continue to follow these cases and new filings touching on these issues.  If you have any questions about your specific situation, we are of course ready to help.  

 

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