Coronavirus contract disputes start hitting the courts

Companies are suspending or terminating business agreements by relying on a common but rarely invoked escape hatch in the fine print of many commercial contracts, as the new coronavirus and government measures to slow its spread upend the economy.

Known as "act of God" clauses -- or "force majeure," French for "superior force" -- the provision has been cited in court cases across the U.S. and around the world in recent weeks by companies large and small -- from California developers to global energy firms.

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The coronavirus crisis is putting a spotlight on the clauses and testing the sanctity of contracts -- a cornerstone of the market economy -- like no other event, lawyers say. A wave of litigation is expected in the coming months.

"What we have here is an unprecedented nationwide force-majeure event," said David Marmins, an Atlanta real estate litigator who works with landlords and tenants and has handled force-majeure cases.

Force-majeure clauses are routine in contracts, from collective bargaining agreements -- such as the one between National Basketball Association owners and players -- to bank loans to drilling rights. They typically spell out extraordinary circumstances that can excuse a party from contractual obligations, including natural disasters and disruptions such as war, rioting, terrorism or government interventions.

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Live performance contracts are more likely to address pandemics -- a lesson learned from earlier viral outbreaks such as SARS that canceled concerts and left event promoters in the lurch.

In other types of contracts, the terms are often boilerplate and don't contemplate a global disaster such as Covid-19, the disease caused by the coronavirus that has killed more than 33,000 Americans and sickened hundreds of thousands more. Some businesses say state-imposed restrictions on travel and commerce have made it close to impossible for them to deliver on contracts.

But the pandemic is no guaranteed exit ramp from a contract. Force-majeure declarations are already sparking disputes.

In California, a retail developer is citing force majeure in trying to delay its purchase of a 120-acre tract of land in Culver City from Exxon Mobil Corp. The developer, Pacific Collective LLC, said government stay-home orders prevented it from immediately bringing in construction workers, architects, inspectors and others to develop the land, according to its lawsuit filed in Los Angeles County Superior Court.

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Pacific Collective claimed that meeting the agreement's deadline would "pose a danger to human life" and expose the company to criminal prosecution.

Exxon disagrees. In an April 3 letter to Pacific Collective, a lawyer for Exxon said the shutdown orders didn't prevent the company from closing the transaction, according to court documents.

"Pacific Collective is a small business in the same difficult environment that millions of other small businesses around the country are facing," an attorney for Pacific Collective, Gabriel G. Green, said. Exxon declined to comment.

The legal concept has gray areas and a paucity of case law underpinning it, making the disputes unpredictable, Mr. Marmins said. It isn't clear whether a pandemic counts as an act of God, a catchall term often featured in the clauses. A business entity allowed to operate during the outbreak could have a harder time finding relief, according to Mr. Marmins. Financial difficulty alone doesn't amount to a force majeure, he said.

Even if a contract lacks a force-majeure clause, disputes can arise under a common-law doctrine that allows for parties to be excused of obligations if a change in circumstances makes the contract impossible to carry out.

In federal court in Texas, the owner of a Houston-based dine-in movie-theater chain called Star Cinema Grill is claiming a Mexican cinema chain is unlawfully reneging on an agreement to acquire the company. In March, a subsidiary of Cinemex agreed to purchase Star Cinema's locations but terminated the deal later that month as the outbreak spread, according to Star Cinema's lawsuit.

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Their purchase agreement had no force-majeure clause, but attorneys for Cinemex say it wasn't obligated to buy theaters shut down by government orders.

"This case is about preventing Cinemex...from exploiting the Coronavirus-induced public health disaster as a pretext for walking away from a legally binding agreement," Star Cinema's complaint states.

Attorneys for Star Cinema and Cinemex didn't respond to requests for comment.

Whether a business can take shelter under force majeure depends a lot on the specific language and events listed and how strictly a state court applies the doctrine, legal experts said.

Typically, a qualifying force majeure event must be unforeseeable and unavoidable and must make it impossible or onerous for a party to fulfill its side of the bargain, they said.

Outside the U.S., energy and mining companies have claimed force majeure in recent weeks, as the pandemic caused demand for oil, gas and other commodities to plummet and their prices to fall to historic lows.

Energy traders said China's state-owned Cnooc Ltd. declared force majeure in February and refused to buy liquefied natural gas cargoes it had contracted. Cnooc didn't respond to a request for comment. In India, energy buyers declared force majeure on both crude and LNG cargoes after Covid-19 induced a nationwide lockdown, according to people familiar with the matter.

Traders have questioned some energy-industry force-majeure claims, saying they were motivated more by fallen prices than by pandemic health concerns. In some force-majeure declarations, traders said, ports were still open and accepting oil and gas deliveries.

Companies sometimes invoke force majeure to encourage a renegotiation of contracts, said John Gilbert, a London-based litigation partner at the law firm Bracewell.

"It's often a stick used to try and do a compromise on an existing agreement," he said.

--Sarah McFarlane contributed to this article.