By the end of the year, the words “unprecedented,” “unusual,” and “difficult” will probably no longer mean much in our public parlance. We Americans have already run out of ways to describe the pandemic, though its economic and psychological ramifications are not likely to be fully understood for many decades.
What Americans do know, however, is that the coronavirus pandemic is pulling the rug out from underneath the American economy. According to a recent study conducted by McKinsey and Company, 64 percent of US businesses with $500 million or less in annual revenue are expecting minimal or negative growth in the coming fiscal year. Small firms like these employ nearly half of the American workforce and form the backbone of the nation’s economy, yet many of them do not have the savings or resources to adjust to the prolonged pandemic. The upfront costs of personal protective equipment (PPE) and workspace readjustments, as well as the fact that small businesses are disproportionately service-based and therefore reliant on in-person transactions, burden small businesses far more than Fortune 500 conglomerates, ultimately leading to lowered competitiveness with large firms.
To make matters worse, even where small businesses survive this disadvantageous pandemic market structure, many are folding due to pre-pandemic legal obligations. Signees to contracts whose terms were violated due to pandemic-related reasons are rushing to the courts, looking to cut financial losses through jury verdicts. The most common defense against these breach-of-contract allegations is the doctrine of force majeure. The doctrine often appears when an event beyond the reasonable control of a party occurs and impacts the party’s performance in the form of contractual provisions that foreclose penalties for non-performance, or failure to satisfy contractual obligations. Such events are often classified, in contract jargon, as “acts of God.” Regrettably, force majeure defenses hold up poorly in court. In many rulings since the pandemic, Covid-19 has not been ruled as a qualifying event. Meanwhile, the shifting meaning of “reasonable” also tends to disadvantage parties sued for breach of contract, since in the pleading stage facts are construed favorably to the plaintiff. Therefore, to level the playing field and protect small-business defendants, the federal government must declare Covid-19 an “act of God.”
An emblematic failure of the force majeure defense recently occurred in the Southern District of Florida. In the early September case Palm Springs Mile Associates v. Kirkland’s Stores, Inc., a federal judge rejected a motion to dismiss a real estate firm’s allegation that the defendant’s store, in failing to pay its rent since April, was liable for breach of contract. The defendant, Kirkland’s Stores, Inc., had relied on a force majeure defense in its motion to dismiss. This approach failed, according to District Judge Robert Scola, who wrote that Kirkland did not “point to factual allegations… that show the government regulations themselves actually prevented Kirkland from making rent payments.” This is despite Mayor Carlos Giménez’s March 12 emergency stay-at-home order preventing in-person operations of brick-and-mortar stores in Miami-Dade County, where Kirkland is situated. Kirkland will likely file for bankruptcy.
While the Palm Springs decision is not binding in other courts, it is significant as an early attempt at a force majeure defense. The decision also gives two harrowing insights. First, judges may set an unreachable bar for the defendant to show the nexus between Covid-related exigencies and inability to perform duties. In the case of Kirk- land, a local directive banning in-person business operations was not even enough. Second, judges are content to let force majeure cases go to trial, inflicting massive expenses on the defendant. Refusal of a motion to dismiss is by no means a finding in favor of the plaintiff. However, it does often seal the economic fate of the defendant, as small businesses simultaneously scramble to finance court battles and stay afloat during the worst pandemic in a century.
In other districts, defendants have occasionally made successful force majeure defenses, but these partial victories have been dependent on specific circumstances and therefore offer little help to litigants facing anything short of identical circumstances. These decisions often apply the law differently. An Illinois court’s ruling this summer, in a case pertaining to Hitz restaurant group, adopted the opposite logic of Palm Springs. Hitz had also failed to pay rent, and the contracts of both Kirkland and Hitz include a force majeure clause. But here, a bankruptcy judge found that force majeure was “unambiguously” triggered by Illinois Governor J.B. Pritzker’s stay-at-home order, which includes a ban on in-restaurant dining. As a result, Hitz was absolved of paying its full commercial rent. But the court narrowly construed Covid-19’s “reasonable” impact. In response to Hitz’ concession that it “could [have] used” up to 25 percent of its square footage to offer take-out services, the court ordered Hitz to pay 25 percent of its rent obligation, even though the plaintiffs did not plead that Hitz could have converted to take-out, and it was not obvious that the high-end eatery could have done so.
Legal commentator Paul Mirr of JD Supra has characterized this decision as “extremely alarming… and [amounting] to yet another in a growing list of tenant-friendly COVID-era decisions.” But the Hitz case is far from tenant- friendly, and for courts to presume so is dangerous for small businesses. It takes a barely supported assumption that a restaurant is able to reinvent its business on the fly and turns that assumption into a costly recovery. While views like Mirr’s largely circulate within defense counsel circles and legal news sites, they point to the more dangerous assumption held by some that contracts are contracts, force majeure or not, no matter the economic and social cost of their satisfaction.
A look at recent decisions suggests that the majority of jurisdictions are following the corporation-friendly dicta of the New York district courts in which failure to perform is only excused when payment is “rendered impossible by an unforeseen event” (In re Cablevision Consumer Litigation, E.D.N.Y. 2012). “Impossibility,” the point at which “reasonable” performance ends, relies on a subjective finding that differs from judge to judge. Yet the force majeure doctrine has never required that performance be “impossible;” it simply requires that an unforeseen event sufficiently impedes performance. As things stand, the cards are stacked against the businesses.
Part of the issue is that courts are relying on dicta, where a judge includes their opinion on issues that do not directly relate to a case, and therefore are not binding to guide Covid-era decisions. Covid-19, however, is without precedent, and the level of impediment to non-performing businesses varies wildly. The subjectivity inherent to these decisions has led the Palm Springs and Hitz courts to almost diametrically opposing conclusions. Judge Scola wrote that Covid-19 and local shutdowns are not “proximate causes” of non-performance. What exactly qualifies as “proximate” in the Southern District of Florida is anybody’s guess; predicting these force majeure outcomes in other jurisdictions is nearly impossible.
If courts find in favor of the plaintiffs, there is little recourse for the defendants. The SARS pandemic of 2003 has discouraged insurance providers and underwriters from including pandemics in their policy language. It is also unlikely that a relief bill will pass through the Senate as Majority Leader Mitch McConnell has adjourned the body after a frantic rush to confirm Justice Amy Coney Barrett. In the meantime, courts around the country are delivering inconsistent rulings and requiring defendant businesses to make crippling compensatory payments. In any case, the delay allows cases to wind through the courts, incurring litigation expenses on all sides and further damaging defendant businesses.
The solution may actually be very easy. President Donald Trump could immediately issue an executive order or Attorney General William Barr could issue a Department of Justice (DOJ) guidance document, proclaiming that Covid-19 is within the meaning of an “act of God” or any other emergencies or events within force majeure clauses. Separation of powers ensures that these documents will not bind federal courts, and there is little precedent on the legal ramifications of a judge ruling in contravention to either an Executive Order or a guidance document. However, a statement from the President or the DOJ can guide judges, should they ever find themselves teetering on the conceptual fine line when deciding whether Covid-19 is proximate enough to qualify as an unforeseen exigency. Of course, these inquiries should remain fact-dependent and rigorous. But there will invariably be cases with facts that are more ambiguous, and to the extent that judges can be helped in these difficult litigations, the federal government should not hesitate to draw a clearer line.