Pandemic Restrictions May Provide An Exit From Contract Obligations

Pandemic Restrictions May Provide An Exit From Contract Obligations | West Coast Franchise Law

In what is probably an unprecedented decision, the United States Bankruptcy Court for the Northern District of Illinois has ruled that governmental shutdowns and restrictions imposed to curb the spread of COVID-19 could be considered a Force Majeure event and give a business a valid reason to exit from contract obligations during the pandemic.

On June 3, 2020, the U.S. Bankruptcy Court held, in In re Hirtz Restaurant Group, that the restaurant’s lease had a force majeure clause that permitted either party to suspend performance of their obligations if they were “prevented or delayed, retarded or hindered by . . . laws, governmental action or inaction, orders of government….”

In this bankruptcy case, the restaurant argued that they could not pay rent because of government-enforced restrictions that prevented them from serving customers. The court found this argument persuasive but since the restaurant was still using 25% of the space for takeout orders, they were assessed a portion of the rent.

The ability to cancel contract obligations during this pandemic would be a huge financial relief to debtors who are struggling under the weight of unpaid bills as they experience serious revenue contraction. But before a debtor tries to walk away from performance of a contract they need to work with an attorney to carefully investigate what the force majeure clause covers.

Many force majeure clauses excuse performance, except for the payment of rent.  So while a government forced closure due to a pandemic excuses performance of things like making repairs or being open for business, they do not excuse payment of rent.  This provision was supposed to work with business interruption insurance, but as many business owners have learned, business interruption insurance excludes pandemics (only insurance lawyers could have envisioned all this).

If a force majeure provision doesn’t allow complete cancellation of performance during a pandemic, it may be prudent to investigate if it will allow underperformance as the business owner may be unable to meet minimal guarantees as required in the contract.

As many businesses are forced to file bankruptcy due to restrictions and closures, there is still no nationwide gold standard for handling force majeure contractions during this pandemic. Each bankruptcy court will need to assess individual cases based on that state’s interpretation of contract law.

If you have any questions about how to exit from contract obligations during the pandemic or other small business and franchise issues, please contact the experienced franchise and business law attorneys at West Coast Franchise Law today at (206) 724-0846 to discuss your situation.     

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