F is for Force Majeure
Jeffrey Margolis May 7, 2014, 6 a.m.
Sandy taught us a dramatic lesson as to nature’s vagaries and the sanctity of our commercial “home.” The force majeure clause stands high in the pantheon of mostly overlooked boilerplate provisions, but that –as many have found out to their chagrin—is a big mistake.
First off a definition: force majeur(e), French—a “superior force,” in lease-lingo traditionally translated as an Act of God, now in our post -9-11 world, the list has been expanded from the traditional natural “plagues” (fire, flood, hurricane, typhoon, earthquake, lightning, explosion and the like) to contemporary maelstroms such as war, riot, strikes and yes, of course, terrorism and subsets such as enemies of the state, biological warfare agents and “dirty” bombs and even national-level software virus attacks; in each case preventing (mostly) landlord (sometimes) tenant from performing its respective obligations under the lease. So when Sandy shut down a good number of lower Manhattan buildings landlords were not liable for failing to provide access, elevator and other services.
“Force majeure” is a “standard” lease provision that allows a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise, making performance, as one commentator put it “inadvisable, commercially impracticable, illegal, or impossible.” Depending on how long the contravening event lasts, lease performance may be temporarily suspended or the lease becomes subject to termination.
Here’s a sample clause (citation omitted):
“Force Majeure. A Party shall not be deemed in default of this Agreement, nor shall it hold the other Party responsible for, any cessation, interruption or delay in the performance of its obligations (excluding payment obligations) due to earthquake, flood, fire, storm, natural disaster, act of God, war, terrorism, armed conflict, labor strike, lockout, boycott or other similar events beyond the reasonable control of the Party, provided that the Party relying upon this provision: gives prompt written notice thereof, and takes all steps reasonably necessary to mitigate the effects of the force majeure event. If a force majeure event extends for a period in excess of 30 days in the aggregate, either Party may immediately terminate this Agreement upon written notice.”
So the parties are free to negotiate the addition of specific events which are tailored to the transaction in question (one case involved a lease of a baseball stadium box and a field billboard and in addition to the regular laundry list of events the parties included “players’ strikes” and “management lock-outs”). In the space leasing context, landlord may have committed to complete certain work by a date certain (with attendant monetary penalties and even a termination right for failure to meet the critical deadline), so we would expect the force majeure clause to cover contractor strikes, inability to obtain materials, interruption in supply of utilities and governmental delays in issuance of needed permits, to cite a few.
What should we look for in a well drafted force majeure clause: (i) detailed definition of force majeure events; (ii) explicit exposition of what happens when an event occurs; (iii) which of the parties is entitled to suspend performance; and (iv) consequences of the event continuing for more than a specified period of time. Notice and duty to mitigate damages would also be relevant.
The essence of force majeure is to excuse performance where the performance is frustrated due to unforeseen circumstances not reasonably foreseeable and outside the control of either party. The landlord drafted lease clause typically provides that tenant’s obligations –in particular to pay-rent– shall not be affected, so we also highlight the important role insurance will play, for example, business interruption coverage, to ameliorate the potential harshness of this provision—a good thing for both tenants and landlords.
Practice Pointer: As courts tend to construe force majeure clauses very narrowly, be highly specific—such that “terrorism” is followed by “or the ‘threat’ of terrorism.”