202006.160

COVID-19 and Contract Enforcement: Illinois Bankruptcy Court holds that Force Majeure Provisions Excuse some Obligations Under Contract

One of the legal questions that has risen out of the COVID-19 pandemic is what obligations do parties of a contract have when one of the parties is unable to perform under the terms of the contract due to COVID-19?  Many contracts typically include a force majeure provision, or a clause that essentially frees both parties from the liabilities or obligations of the contract when an extraordinary event or circumstance beyond either parties’ control occurs.  Due to the rapid and widespread health and economic impact of COVID-19, such force majeure provisions are becoming a contested legal area as parties grapple with the unforeseen consequences of the pandemic.

On June 3rd, the United States Bankruptcy Court for the Northern District of Illinois interpreted a force majeure provision in the case of In re Hitz Restaurant Group.  This case is one of the first applications of a force majeure provision due to COVID-19.  The Hitz Restaurant Group filed for bankruptcy protection under Chapter 11 and argued that an Illinois state executive order that restricted dine-in restaurant operations due to COVID-19 excused the Group from being required to pay post-bankruptcy petition rents until their lease is assumed or rejected.  The Group’s landlord argued that the force majeure provision did not apply.

The contested force majeure clause read:

“Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by . . . laws, governmental action or inaction, orders of government . . . Lack of money shall not be grounds for Force Majeure.”

The landlord argued that the force majeure clause should not apply for three primary reasons: (1) the banking and mailing system was still functioning so the debtor could still transmit payment to the landlord, (2) the debtor’s inability to pay was due to a “lack of money” and therefore not grounds for force majeure, and (3) the debtor chose to forgo applying for a loan under the SBA Paycheck Protection Program voluntarily waived its ability to meet rent obligations.

The Bankruptcy Court rejected all three arguments. The Court cited the first argument regarding the functioning mailing system as being unresponsive to the actual reason the debtor could not meet its rent payments.  The second argument regarding the “lack of money” clause was rejected by the Court, again, for not being the debtor’s argument for the enforcement of the provision; it was not “lack of money” that the debtor couldn’t pay the landlord, but the executive order shutting down all “on-premises” dining as the proximate cause of the debtors inability to generate revenue and pay rent.  Finally, the Court rejected the landlord’s third argument as there was no language in the force majeure provision to order or borrow money to counteract governmental action or orders, just that such actions or orders impact the landlord and tenant’s abilities to perform under the lease agreement.

The Court concluded that the debtor was not completely off the hook, however, for the missed payments and could have taken actions to protect the landlord’s interest in the leasehold given that only 75% of the square footage of the restaurant was unusable due to the executive order and the remaining 25% of the kitchen could have been used for take-out.  Thus, the Court required 25% of the post-bankruptcy petition rents.  The full post-bankruptcy petition rent was not owed due to the Court upholding that COVID-19 was cause to enact the force majeure provision of the lease agreement.   This ruling is likely the first in a line of force majeure provision cases in light of COVID-19.