May 11th, 2020

Force Majeure: Court Will Decide Whether COVID-19 Excused Developer’s Failure to Close

COVID-19 has disrupted business operations and contracts across industries on an unprecedented scale. Some individuals and companies are trying to avoid or delay their contractual obligations by invoking previously overlooked force majeure provisions. Others are aiming to enforce their contracts after receiving force majeure notices. We expect a new wave of litigation. Last month, one of the first force majeure case arising out of COVID-19 was filed in California: Pacific Collective LLC v. ExxonMobil Oil Corp.

The Facts

Pacific Collective entered an agreement to purchase property in Los Angeles County from ExxonMobil. The property had been used for a gas service station. But, according to Pacific Collective’s complaint, ExxonMobil was aware at the time of the contract that Pacific Collective intended to redevelop the property. The agreement provided that Pacific Collective would pay $70,000 in “earnest money” by February 7, 2020, and would pay the full purchase price of $4.2 million by the March 31, 2020 closing date.  

The Force Majeure Language

The agreement contained the following force majeure provision:

"The deadline for performance of any obligation of a party hereunder shall be automatically extended one day such performance is delayed on account of force majeure, which as used herein means acts of  God, strikes, lockouts, sit-downs, material or labor restrictions by any governmental authority, civil riot, floods, wash-outs, explosions, earthquakes, fires, storms, acts of the public enemy, acts of terrorism,  wars, insurrections, defaults by the other party and any other cause not reasonably within the control of the party whose performance is delayed by force majeure and which, by the exercise of due diligence, the claiming party is unable, wholly or in part, to prevent or overcome."

The Dispute

According to the complaint, on March 30, 2020, Pacific Collective sent a letter to ExxonMobil invoking the force majeure provision. It stated: “while [Pacific Collective] fully intends to proceed with its purchase of the Property, the [Stay-At-Home Orders] and restrictions inhibit [Pacific Collective’s] ability to close escrow while the government orders and restrictions remain in force.” In response, ExxonMobil noted that the notary and escrow services required to close the transaction were “essential services” and that the title company had confirmed its ability to close the transaction.  ExxonMobil warned that if Pacific Collective did not close the transaction and pay the purchase price, it would terminate the agreement. That is precisely what happened. As a result, Pacific Collective sued ExxonMobil to enforce the transaction and its interpretation of the force majeure provision.  

The Issues

The case will turn on the following key issues:

  • Are COVID-19 and the related restrictions triggering events under the force majeure provision? The force majeure provision does not specifically enumerate pandemics. Therefore, the court will examine whether COVID-19 falls into “acts of god” or “any other cause not reasonably within the control of the party[.]” A key question will be whether the parties intended these terms to apply to unforeseeable events only, and whether COVID-19 and the resulting government orders were unforeseeable at the time of the contract, which Pacific Collective signed November 5, 2019 but the parties amended February 7, 2020.
  • Did COVID-19 and the related restrictions delay or prevent Pacific Collective’s performance under the purchase agreement? Based upon ExxonMobil’s response letter, ExxonMobil is likely to argue that it was still possible for Pacific Collective to close the transaction on March 31, 2020 because notary, escrow, and title services were open for business. Pacific Collective may argue for a broader worldview, focusing on the pervasive fear and uncertainty in Los Angeles and the possibility of infection. The court may have to confront a difficult question: what degree of health risk to both individuals and the broader community justifies a delay in performance? 
  • Was Pacific Collective able to overcome any such delay or prevention of its performance by alternative means? Businesses around the world are finding creative solutions to problems caused by COVID-19, particularly through technology. Expect the court to closely examine whether reasonable alternatives were available to Pacific Collective to perform its obligations, including both how Pacific Collective has handled other business transactions or operations and how similarly situated business have handled similar issues during the pandemic.
  • Is the common law defense of frustration of purpose available to Pacific Collective? Pacific Collective made a point of alleging that ExxonMobil was aware of Pacific Collective’s intention to immediately redevelop the property. Pacific Collective appears to be positioning itself for a frustration of purpose defense – a common law defense that releases a party from performance when a supervening event frustrates the underlying purpose of the agreement even where performance is possible -- in the event the court determines that the force majeure provision does not apply. We expect the court to address:  (1) whether the parties’ force majeure provision supersedes a “frustration of purpose” defense; and, (2) whether Pacific Collective’s intended redevelopment was the purpose of the transaction for both parties as required under California’s “frustration of purpose” doctrine. 

It is still too early to predict how courts will react to the issues raised by Pacific Collective LLC v. ExxonMobil Oil Corp. or what lessons can be drawn from it. No two force majeure cases are the same.  Each case requires individualized contract interpretation and factual analysis. 

If you have questions about the Pacific Collective case, or about other force majeure, frustration of purpose, or COVID-19-related defenses, contact Tricia Legittino, Tiffany Caterina or any other member of the Frankfurt Kurnit Litigation Group.