Litigation Trends Involving Force Majeure Clauses and Coronavirus 2020

April 27, 2020

THIS COVID-19 LEGAL UPDATE PROVIDES A REVIEW OF RECENT LITIGATION TRENDS INVOLVING FORCE MAJEURE CLAUSES AMID THE PANDEMIC

As we enter the second full month of government orders directing the mandatory shut down of “non-essential” commercial activity, U.S. courts are seeing an uptick in COVID-19 related litigation filings.  In particular, numerous cases have been filed seeking to enforce or interpret force majeure clauses in commercial contracts (or the lack thereof).

Eckert Seamans has compiled summaries of recent court filings.  Several emerging trends have been identified based upon this sampling of cases:  

First, you should expect that any correspondence exchanged between the parties discussing COVID-19 hardships and/or the force majeure clause will appear as an exhibit to the complaint or responsive pleading.  Accordingly, please remember that any correspondence or response on COVID-19 force majeure issues should be carefully drafted with potential litigation in mind.  Any admission or assertion made in those communications may impact the relief or defenses available in future litigation. 

Second, many of the recently filed complaints include a detailed chronological comparison of the parties’ discussions and/or interactions with the COVID-19 developments.  As a potential plaintiff, this reinforces the need to stay current on all federal, state, and local pronouncements that may be impacting not only your business, but the community(ies) where you are conducting your business.  For example, state and local “stay at home” orders or designations of “essential” versus “non-essential” businesses may enhance (or detract) from the plaintiffs’ characterization of their ability to perform.  Plaintiffs are making every effort to show a causal connection between the COVID-19 disruption and the harm caused by the defendant(s).  As a potential defendant, it is prudent to track this same information so that you can defend or deflect any position a plaintiff attempts to take pre-litigation and readily dispute any inaccurate allegations a plaintiff makes once a complaint is filed.

Third, plaintiffs are getting creative.  Even in these early stages of COVID-19 force majeure litigation, there is no one-size-fits-all complaint.  The complaints filed thus far emanate from a wide range of industries including: real estate, restaurant, landlord/tenant, fitness, and entertainment.  The complaints are being filed in both state and federal courts, and most include declaratory judgment and breach of contract claims.  Several plaintiffs are even seeking injunctive relief.  In addition to an increase in the number of breach of contract claims being filed, we anticipate a commensurate increase in the number of answers and affirmative defenses invoking force majeure clauses where applicable. 

Finally, and unlike the host of state legislation recently introduced to address business interruption insurance liability, we have not seen a similar spike in legislation to forestall – or encourage – force majeure litigation.  However, Eckert Seamans will continue to monitor state legislative developments related to COVID-19.  

When reviewing your contracts for purposes of termination or enforcement, you should consult with legal counsel to carefully analyze any force majeure provisions and common law remedies, and then critically evaluate whether such concepts are, in fact, triggered by a COVID-19 event.  You should also carefully consider other contract provisions that would support (or undercut) non-performance.  For instance, the doctrines of impossibility or impracticality of performance, and frustration of purpose, may apply.  As noted above, it is important to maintain a chronological factual record of the events as they transpire so that the information is readily available to counsel if/when a complaint is filed. 

RECENT FILINGS

March 10, 2010

Mon Ethos Pro Consulting, LLC v. Zeds Dead, Inc. et al., Case No. 20-SMCV-00397, Superior Court of California, County of Los Angeles.

  • Mon Ethos Pro Consulting, LLC (“Pro Consulting”) entered into an agreement with defendant Edwin Jefferys and his agent for Jefferys to perform in Massachusetts in June 2020. Pursuant to the terms of the agreement, Pro Consulting was due to pay defendants on March 10, 2020. 
  • Pro Consulting did not deliver payment, taking the position that its performance is excused pursuant to the contract’s force majeure clause, which has been triggered by the COVID-19 situation.
  • Pro Consulting’s complaint seeks a declaratory judgment that it has properly invoked the force majeure clause and that it has not breached the agreement with Jefferys and his agent.

April 2, 2020

Omar Khan, et al. v. Cinemex USA Real Estate Holdings, Inc. et al., Case No. 4:20-cv-01178, U.S. District Court for the Southern District of Texas, Huston Division.

  • Omar Khan owns all equity interests in the corporation-plaintiffs (collectively “Plaintiffs”). Plaintiffs and Cinemex USA Real Estate Holdings, Inc. (“Cinemex”) negotiated an agreement where Cinemex would purchase Plaintiffs’ business, Star Cinema Grill – a Houston-based dine-in theater.  The transaction was set to close on March 26, 2020.  On March 24, 2020, Cinemex’s counsel informed the Plaintiffs that “in light of the COVID-19 related fallout, Cinemex will not and is not obligated to close this transaction.” 
  • Plaintiffs’ complaint seeks relief for Cinemex’s failure to close on the agreement through a breach of contract claim. In anticipation of Cinemex’s attempt to utilize the agreement’s force majeure clause, Plaintiffs’ complaint seeks a declaration that the agreements’ force majeure clause does not excuse Cinemex’s refusal to close the deal.

Level 4 Yoga, LLC v. CorePower Yoga, LLC et al., Case No. 2020-0249, Court of Chancery of the State of Delaware.

  • Level 4 Yoga, LLC (“Level 4”) entered into an agreement with defendants to purchase 34 of Level 4’s yoga studios. Closing on 15 of Level 4’s yoga studios was set for April 1, 2020.  The transaction did not close on that date.  Level 4 filed its complaint, seeking a declaratory judgment that that agreement remains in full force and that defendants are obligated to perform under the agreement; specific performance requiring defendants to perform its obligations under the agreement; and relief for defendants’ breach of the agreement. 
  • Notably, the agreement between Level 4 and defendants did not include a force majeure provision. However, Level 4 expressly pleads this fact and uses it as a basis to argue that defendants “could have insisted that the [a]greement include a force majeure clause, but they did not.”

April 3, 2020

Pacific Collective, LLC v. ExxonMobil Oil Corporation, Case No. 20-STCV-13294, Superior Court of the State of California, County of Los Angeles.

  • Pacific Collective, LLC (“Pacific”) entered into a purchase agreement for real estate with ExxonMobil Oil Corporation (“ExxonMobil”) on February 2, 2020. Due to the COVID-19 health crisis, and citing to the purchase agreement’s force majeure clause, Pacific requested that the closing date be extended past the March 31, 2020 deadline.  ExxonMobil remained ready and willing to close on March 31, 2020 and when that date passed with no closing, sent Pacific a termination notice.
  • Pacific’s complaint brings a breach of contract claim, seeks specific performance of the purchase agreement, and seeks declaratory relief with a request for temporary, preliminary, and permanent injunctive relief.

April 6, 2020

E2W, LLC v. KidZania Operations, S.A.R.L., Case No. 1:20-cv-02866, U.S. District Court for the Southern District of New York.

  • E2W, LLC (“E2W”) is a franchisee pursuant to a franchise agreement by and between it and KidZania Operations, S.A.R.L. (“KidZania”). E2W claims that it is not in breach of the parties franchise agreement because any shortcoming of its performance is due to COVID-19 events, which are a triggering event pursuant to the franchise agreement’s force majeure provisions.  It is E2W’s position that its performance under the franchise agreement is currently suspended.  
  • E2W’s two count complaint seeks relief for KidZania’s improper termination of the franchise agreement.

April 13, 2020

Mechanical Contractors Association of America, Inc. v. 3900 WA Associates, LLC d/b/a Four Seasons Resort Maui, Case No. N20C-04-104ALR, Superior Court of the State of Delaware.

  • Mechanical Contractors Association of America, Inc. (“Mechanical Contractors”) intended to hold its annual convention in Wailea, Hawai’i between March 11 and 20, 2020. Mechanical Contractors then entered into the agreement with 3900 WA Associates, LLC (“WA Associates”), which required WA Associates to set aside a block of hotel rooms for Mechanical Contractors’ members and other guests attending its convention.
  • Mechanical Contractors canceled its convention, and its “decision to cancel the 2020 [c]onvention, and invoke the Force Majeure Section in the Agreement, was based solely on the novel coronavirus, COVID-19, that has affected the world, including the United States.”
  • Mechanical Contractor’s two count complaint seeks a declaratory judgment and relief for WA Associates’ breach of the agreement. Mechanical Contractor seeks the return of its deposits and a judgment holding that the force majeure provision of the contract was triggered by the current COVID-19 health crisis, and it is not liable to WA Associates for a cancellation fee.

April 20, 2020

Palm Springs Mile Associates, LTD. v. R&R Goldman Associates, Inc. d/b/a Discovery Clothing Company, Case No. 1:20-cv-21656, U.S. District Court for the Southern District of Florida, Miami Division.

  • Palm Springs, Mile Associates, LTD. v. Taco Bell of America, LLC et al., Case No. 1:20-cv-21650, U.S. District Court for the Southern District of Florida, Miami Division.
  • Palm Springs Mile Associates, LTD is the landlord to R&R Goldman Associates, Inc. and Taco Bell of America, LLC. Landlord entered into separate leases with R&R Goldman Associates, Inc. and Taco Bell of America, LLC.  In light of the COVID-19 health crisis, both tenants failed to submit April rent payments.
  • Landlord filed these complaints seeking April 2020 rent, the total rent and other charges for the full term of the leases, and attorney’s fees.
  • Landlord claims that failure to pay rent is not suspended by either of the leases’ force majeure clauses.

April 22, 2020

SP VS Buyer LP, v. L Brands, Inc., Case No. 2020-0297, Court of Chancery of Delaware

  • SP VS Buyer LP (“SP VS”) seeks a declaratory judgment confirming that it properly terminated its agreement with L Brands, Inc. (“L Brands”) to acquire a majority interest in L Brands’ Victoria’s Secret Business.
  • SP VS alleges that, “because L Brands has breach its covenants in the parties’ Transaction Agreement . . . and has caused several of its representations and warranties in the Transaction Agreement to become false, L Brands cannot satisfy the conditions precedent to closing, and [SP VS] was permitted to terminate the Transaction . . . The spread of a novel coronavirus (“COVID-19”) provides no relief to L Brands under the terms of the Transaction Agreement that Plaintiff seeks to enforce.”
  • While the parties’ agreement does not include an explicit force majeure clause, their 109-page agreement does include the defined term “Material Adverse Effect” which includes “the existence, occurrence or continuation of any pandemics . . . acts of God or any national, international or regional calamity.”

 

Click here to view a downloadable PDF of the legal update.

This COVID-19 Legal Update is intended to keep readers current on developments in the law. It is not intended to be legal advice. If you have any questions, please contact authors Ray F. Middleman at (412) 566-6054 or rmiddleman@eckertseamans.com, Alison R. Viola at (412) 566-2148 or aviola@eckertseamans.com, or any other attorney at Eckert Seamans with whom you have been working.

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Alison R. Viola Photo Pittsburgh

Alison R. Viola

Associate - Pittsburgh

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