Additional contributor: Caleb Kampsen
Dick’s Sporting Goods recently fired the first shot in what will likely be a flood of litigation concerning a rarely invoked contract principle: the “force majeure” clause. A “Force majeure” clause (Latin for “superior force”) essentially allows a party to a contract to cancel the agreement due to some extraordinary, unforeseen event that makes performance impossible. For example, a labor strike could prevent a party from delivering goods.
Any contract lawyer will tell you these clauses are rarely invoked and consequently, are often glossed over in the drafting process. But the COVID-19 pandemic will likely change that as adding “public health pandemic” or some other iteration to the list of force majeure events in a contract will be a must going forward.
Commercial leases tend to have draconian provisions for tenants. It’s common to see lease terms with heavy annual rent escalators and terms of 5 to 10 years, or even longer. They are usually drafted by the landlord’s attorney and tenants tend to give them little attention. But what happens when out of the blue, businesses are forced to shut their doors for an extended amount of time and they can’t pay the rent?
Dick’s Sporting Goods recently sent letters to the landlords of their stores (Dick’s Sporting Goods has approximately 850 stores) informing them Dick’s viewed the COVID-19 pandemic as a force majeure event. Consequently, Dick’s Sporting Goods argues that it is not legally required to pay any rent obligations to its landlords if their contracts contain a force majeure clause. It’s likely that Dick’s Sporting Goods won’t be the only business seeking to invoke a force majeure clause in a contract as a result of the COVID-19 pandemic.
Typically, force majeure clauses set forth “a list of events and a general catch-all provision” that provides what constitutes a force majeure event. Such events can include natural disasters or other events that weren’t foreseeable by both parties. In essence, as long as the parties agree to it in the force majeure clause, it can be included as a force majeure event. But generally this is only the first step of a Court’s analysis of a force majeure clause. Once the Court determines whether or not the event qualifies as a force majeure event under the force majeure clause, the Court then determines whether the “event was reasonably beyond the control of the party invoking the force majeure clause.” Finally, the Court must evaluate the effect of the force majeure event on the performance the party wants excused.
In the case of Dick’s Sporting Goods (or any business seeking to invoke a force majeure clause), Dick’s probably would first need to show that the COVID-19 pandemic either is explicitly contemplated (through mention of a pandemic or other medical catastrophe) or falls under the catch-all provision of the clause. Then, Dick’s probably would need to prove that the COVID-19 pandemic “was reasonably beyond the[ir] control.” Finally, Dick’s would probably then need to show that because of the COVID-19 pandemic, it is not able to fulfill it’s obligation under the contract (i.e., payment of rent).
Depending on the specific economic situation Dick’s is in, as well as the specific force majeure clauses Dick’s is attempting to invoke, these requirements may or may not be easy to fulfill. However, the COVID-19 pandemic might mark the start of businesses and other contracting parties seeking to insert language about a pandemic, or government stay-at-home orders into a force majeure clause. It is also possible the COVID-19 pandemic will result in a broadening of the definition of force majeure within contracts, as well as broaden force majeure clauses in contracts that are entered into after the pandemic is over. Much like the COVID-19 pandemic itself, only time will tell how these developments play out.
Aaron Bailey is an attorney licensed to practice in state and federal courts in Kansas. Mr. Bailey practices in areas of business and commercial transactions and litigation, including matters involving breach of contract If you have questions about your rights under a contract, call Aaron at 785-357-6311.
Caleb Kampsen also contributed to this article. Caleb is currently a 2L at the University of Kansas School of Law and works part time at Sloan Law Firm as a law clerk, assisting with legal research and writing.
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