If the agreement lists a pandemic or
its effects as a force majeure event,
the next practical step is to notify
the counterparty that the force
majeure clause has been triggered.
Many agreements require parties to
cooperate to find a mutually agreeable
path forward in response to a force
majeure event before terminating
the agreement. While there is an
implied duty to act in good faith with
respect to any agreement, it’s best to
cooperate with vendors and business
partners regardless of the terms of
the force majeure provision, especially
when it comes to lucrative and repeat
contractual relationships. To reduce
risk, a business should only terminate
an agreement if the agreement
explicitly provides for termination or
if performance remains impossible
despite the parties’ cooperative
efforts.
Keep in mind that force majeure
provisions also have potential
pitfalls. If a business is seeking to
excuse performance, it should tread
carefully around the application of
“catchall” force majeure terms. For
instance, in New York, courts only
give force majeure effect to events
that are of the same general kind
as those specifically listed in the
force majeure clause, even if the
clause permits termination for “any
other reason.” Moreover, in many
jurisdictions, performance may not
be excused if it would merely be more
burdensome or unprofitable to carry
out the agreement. In any event,
force majeure may be more readily
applicable to contractual obligations
that are tied to a specific date such
as a construction completion date or
an event like a concert, wedding or
program relating to a religious holiday
such as Passover or Easter. When
invoking a force majeure clause in this
context, a hotel should communicate
that its ability to perform within the
contractual time frame is prevented,
hindered or precluded by COVID-19-
related restrictions.
If a pandemic or its effects are
not included in the force majeure
clause (or if the contract has no
force majeure clause), a business
might be excused from performance
under the “impossibility” doctrine.
Impossibility may be invoked where
the performance of the contract
has been rendered objectively
impossible, and the event causing
the impossibility was unforeseeable
at the time the parties entered the
contract. Hotels may rely on this
defense in situations where their
performance is rendered impossible
by COVID-19 related restrictions.
Generally, courts apply the doctrine
of impossibility narrowly. Accordingly,
hotels may not be released from
contracts where their only obligation
is to pay an agreed upon sum, because
it may remain objectively possible to
render payment. By the same token,
performance would not be excused
where the rescheduling of an event or
program is objectively possible.
Contractual performance also may
be excused under the “frustration of
purpose” doctrine if the COVID-19
pandemic’s impact has rendered the
agreement’s performance worthless.
To invoke this doctrine, a hotel must
establish that the pandemic has
substantially frustrated the contract’s
basis to the point where the contract
makes little sense. A common
example of frustration of purpose in
the COVID-19 context is when a large
event must be cancelled due to social
distancing mandates, depriving the
contractual parties of any value from
the agreement. While this doctrine
may release a hotel from its obligation
to host the event, it does not
necessarily settle prior commitments
such as nonrefundable deposits and
payments made to suppliers, sponsors
or other vendors.
Disputes between contracting parties
over non-refundable deposits and
other advance payments are ripe for
litigation. Under these circumstances,
a court may apply principles of
fairness to determine parties’ rights
with respect to any guest deposits
or the value of any payments for
goods and services in connection
with a cancelled event. Hotels may
be able to recoup some losses from
vendors by invoking the common
law doctrine of “restitution”, which
prevents parties who do not or cannot
perform from obtaining a windfall.
Once hotels maximize their recovery
from vendors, they will be in a better
position to resolve disputes with guests
concerning the return of deposits for
cancelled events or reservations.
Other areas ripe for litigation
include disputes over operating
lease payments, loan payments,
unmet construction deadlines
and termination of exclusive use
provisions to maximize revenue from
the premises. Disputes such as these
currently are in their early stages and
most U.S. courts have been impacted
by COVID-19-related restrictions.
As a result, the full panoply of rights
and remedies available to contract
counterparties has not yet been
determined.
In upcoming weeks and months,
hospitality businesses should examine
their contracts for force majeure
clauses and consider the above
doctrines for ideas as to approaches
to contract-unwinding negotiations.
In addition, they should negotiate
current and future contracts carefully
to ensure the contracts include as a
force majeure line item the possibility
of pandemics (or, more broadly,
public health-related events) and
government actions or mandates
relating thereto.
About the author
Zachary M. Seelenfreund is a litigation
associate, Philip T. Simpson is a litigation,
real estate and trusts & estates partner,
and Jeanne R. Solomon is a corporate
partner at NYC-based law firm Robinson
Brog Leinwand Greene Genovese & Gluck
P.C. For more information, visit www.
robinsonbrog.com.
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