'As It Happens': The COVID-19 Pandemic and Force Majeure Clauses

By: Johan Rosenberg, Chairman

During this uncertain time, DeveloP3rs hopes to provide information and resources to your organization 'as it happens'.  Please reference three resources we would like to share with you at this time: 

1. The coronavirus could kill off a host of US colleges. Learn more...

 2. University of Idaho reveals plan for energy/infrastructure P3 as University looks for alternative sources of revenue. Learn more...

3. Kansas State University Foundation continues to move forward with alumni housing adjacent to campus.Units start at $499,000. Learn more...

As a P3 consultant, DeveloP3rs has been involved in the review and negotiation of numerous contracts related to P3 projects, including the various events of default and termination provisions.  While institutions should seek legal advice from their counsels regarding specific circumstances, below are some general observations that may prove useful in the context of the COVID-19 pandemic.

If your institution or your vendors seek to avoid performance of a commercial contract, or cannot provide contracted-for services or goods due to the disruptions caused by COVID-19, you may want to review if there is an explicit “force majeure”clause and understand the definition of events that trigger the clause and any timely notice provisions. Even in the absence of an explicit force majeure clause, you or your vendor may still seek relief under UCC Law if your circumstances have changed whereby it is an impossibility, a commercial impracticality, or “frustration of purpose.”

Generally, when seeking relief via force majeure, a party must prove that the failure to perform was proximately caused by a contingency and that, in spite of skill, diligence, and good faith on the promisor’s part, performance remains impossible or unreasonably expensive.

In some jurisdictions (not all), invoking “impossibility” may provide relief for the performance of the contract. The contract must be determined to be objectively impossible by an event that is unforeseen and could not have been guarded against in the contract.

For example, if a university leases adjacent land from the federal government so that they can develop new student housing for in-state students but the federal government rezones the land and forbids commercial uses, or the land is destroyed by a flood, the university may be excused from performing the contract by impossibility.

Similarly, relief can be sought under the legal doctrine of “frustration of purpose”, which arises when the obligors can still perform, but some subsequent event has fundamentally changed the nature of the parties’ bargain. The frustration must be so extreme that the assumed risks the party is invoking frustration towards were not and could not have been foreseeable.

For example, if the availability of in-state students evaporates due to a widely impacting nuclear disaster surrounding the most populous parts of the state, but not in the locality of the student housing, the university may be excused from performing the contract even though it could still carry out its obligations under the lease, because the federal government knew the university’s primary purpose for entering into the lease was to serve only in-state students. With that population severely diminished, the purpose has been frustrated.

As a final takeaway, check to see if the force majeure provision contains explicit references to outbreak, epidemic, pandemic, or catchall phrases such as “any other event outside the parties’ control,” and keep in mind that even a governmental order may not necessarily be considered enough to invoke force majeure. Depending on the longevity of lockdowns and the COVID-19 crisis, courts may not find the economic effects enough to invoke force majeure, without specific economic downturn language in the contract.

It is advisable for an institution to conduct in-depth analysis with its legal counsel and advisors before making any decisions or taking actions based on a force majeure provision.

Blue Rose Capital Advisors and DeveloP3rs are experienced in representing universities and negotiating on behalf of clients with creditors, investors, bondholders, and other parties in a wide variety of transactions.

Contact Us!  Johan Rosenberg and Justin D. Krieg, PhD DeveloP3rs - a Division of Blue Rose Capital Advisors, LLC/ TRIL 1 LP www.DeveloP3rs.com | (952) 746-6050 | bjrosenberg@blueroseadvisors.com DeveloP3rs@blueroseadvisors.com

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