Covid-19, Emergency Pandemic Orders, and Force Majeure
The Law Court recently weighed in on a trending legal issue – the extent to which Covid-19 restrictions trigger “force majeure” contract clauses. In 55 Oak Street LLC v. RDR Enterprises, Inc., the Law Court considered the applicability of a force majeure clause in the context of emergency pandemic orders.
In what is a very familiar story that has played out across the country, Defendant RDR Enterprises, which operated a restaurant in a space owned by Plaintiff 55 Oak Street, was forced to close for a period of time as a result of emergency pandemic orders. Subsequently, under revised pandemic orders, RDR was allowed to reopen at a limited capacity of approximately 35 guests; it did not do so because of its concerns about the economic feasibility of such operations. After RDR failed to pay its rent, Oak Street filed a forcible entry and detainer action to evict RDR.
The central question in the case, on appeal, was whether Oak Street was entitled to possession based on RDR’s failure to pay rent during the period it was allowed to operate at a limited capacity or whether RDR’s nonperformance was excused by the force majeure clause in the parties’ lease. (On appeal, Oak Street did not challenge the lower court’s conclusion that the shut-down order constituted a governmental restriction excusing non-performance under the force majeure clause.) The district court had concluded that the force majeure clause partially excused RDR’s obligation to pay rent.
The Law Court disagreed. The Court, noting that a “‘force majeure’ is an unanticipated and uncontrollable event,” observed that a “force majeure clause is a provision in a contract providing that certain supervening events may excuse a party’s performance obligations.” The Court concluded that the lease’s force majeure clause did not partially excuse RDR’s duty to pay rent for two reasons. First, the language of the force majeure clause did not contemplate partial non-performance. Second, as the Court wrote, the language of that clause also did
not excuse a party’s nonperformance based on governmental restrictions that limit the party’s ability to make a profit, rather than preventing the party from carrying out the use contemplated by the contract.
This latter point is of the greatest interest. While, as the Court noted, the effect of force majeure clauses depends on the specific language used by the parties, the decision in 55 Oak Street highlights an important distinction. Force majeure clauses are more likely to apply where nonperformance was “compelled by the pandemic or governmental restrictions” and less likely to apply where nonperformance “was an economic decision based on concerns about the financial feasibility of a partial opening.” As the Court observed,
As a general matter, events causing economic hardship, such as market downturns, do not constitute force majeure events unless specifically designated in the contract.
The Court ultimately held that, “[i]n the absence of express contractual language,” it would not read into a force majeure clause “the concept of a ‘partial’ excuse for nonperformance based on events such as the issuance of executive orders that reduce seating capacity.”
The bottom line? As a general matter, force majeure clauses apply only in the case of impossibility and do not excuse performance simply for economic hardship.