Will The Pandemic Trigger a Force Majeure Clause?
The legal term Force Majeure has been getting a lot of attention recently. The term is not uncommon in contracts of any type seen in the action sports industry, but seldom was it given much thought. After all, how often does an act of God actually occur? Turns out pretty often, but for the most part, these events are more acute in nature, meaning short-lived. An easy example would be a hurricane hitting a coastal Florida town and damaging a local surf shop. That shop may sustain significant damage to the building thereby making it unsafe, and as such both parties could be excused from their contractual obligation to pay rent, and furnish a building space. Then there is the contract for sale between that retailer and manufacturers- what happens to those contracts? Typically those contracts are excused by the manufacturer or paid out of insurance proceeds.
With Covid-19, a new set of circumstances has arisen- that of a prolonged effect on business. And the issues facing action sports brands, retailers, distributors, and other suppliers are now forefront as businesses try to navigate how to stay in business, how to pay their employees, and how to address contracts.
With so many moving parts to any particular action sports brand, there are countless contracts entered into each week, and some of those may contain a Force Majeure clause, and some may not. Typically there are contracts such as athlete sponsorship that will often not contain such a clause, while contracts for real property typically do. Then there are all the contracts for the sale and/or purchase of goods that could contain such a clause, or not. It is this uncertainty that leads to confusion in understanding exactly when you, the action sports business, can rely on a Force Majeure Clause. In looking at your contracts with your legal counsel there are a few things that brands and retailers should know about these clauses.
First, courts typically construe a Force Majeure Clause very narrowly. Meaning they look at exactly what the clause contains, and usually don’t take into consideration any and all potential acts of God. Instead, if your lease contains such a clause and specifically states (for you SoCal businesses), Earthquakes, Fires due to wildfire, lightning strike, but does not include hurricane in there, and we are hit by a hurricane in Southern California, it is unlikely in that instance your clause would be enforceable to let you out of your lease. There may be other clauses that get you out of the lease, but Force Majeure probably won’t be one of them.
One thing we don’t know is how courts will apply the current pandemic to these clauses. There is a multitude of areas that may be impacted in your business due to the current business climate. It is important to understand that for some clauses you will be required to give notice, and if you don’t the clause won’t be applicable. Or if the potential breaches foreseeable and you took no measures to avoid the breach, you likely won’t be able to invoke the clause. The key areas for most businesses will be the following;
- Leases. As stated above, your lease is likely your biggest monthly fixed cost aside from payroll. There may be a Force Majeure clause in your lease, but without specifically calling out a pandemic, there is little guidance to be given on how a court could or would rule considering the current crisis. As such it will be vital to have consistent communication with your legal team, and if you are in danger of default on a mortgage or breach of a lease, to be in contact with your lender or landlord.
- Athletes. Most, if not all, athlete contracts specify what an athlete’s obligations are for their sponsor, and rarely is a Force Majeure Clause included. Injury clauses, sure. So if your athletes are still posting to social media, still surfing/skating/riding…there may be little wiggle room on those contracts. However, it would be wise to have legal counsel look at those contracts to determine if prorating those contracts are possible. Most athletes are expected to compete, and seeing as how most sports are on hold at the moment the athletes are not able to perform all of their contractual obligations. Having a talk with legal counsel, and the athlete about a reduction in salary may be the best way to approach sensitive athlete contracts at this time.
- Sale of goods. Within the US the sale of goods is governed by the Uniform Commercial Code (UCC). This body of law, as you are all well aware, is what we look to when trying to decipher a potential breach of contract. Whether it is between retailer and manufacturer, or supplier and manufacturer, the UCC is our body of law. So if we are talking about sales within the US, again, it may be time to call your legal counsel to determine if you have a Force Majeure clause in your standardized contracts and if pandemics are specifically enumerated in those contracts.
- Sale of Goods Internationally. This is a much trickier area to tackle and will require looking at a body of law called The Contract for International Sale of Goods or CISG. This is the body of law, not the UCC, that controls most if not all the contracts for the purchase of goods from overseas. When a factory in another country makes goods for a manufacturer in the US the UCC does not control that contract, the CISG does. Even if the goods are purchased by a US company and shipped to the US. The CISG does differ significantly from the UCC, and moreover there is usually a Force Majeure Clause in those contracts. However, there is no telling how a court applying the CISG will interpret those clauses. If you have goods stuck in a container or a factory that closed and missed a shipping window that now wants to ship those goods you will need to get in touch with your legal counsel immediately to determine if there is a Force Majeure Clause in the contract and if it is applicable.
From manufacturers to retailers, and the employees and athletes at the heart of the action sports industry this global pandemic is having a profound effect on everyone. How significant, or devastating is specific to each company. As painful as it may be to make the call, perhaps now is the time to reach out to your legal counsel to make sure you understand your legal rights, and perhaps to rethink your contracts.
By Travis Wilkerson
Travis served many years in the action sports industry working with different brands and most notably as Membership Director or SIMA before graduating from Whittier Law School. He now works at the Wilkerson Law Firm in Anaheim with his father/partner Jack Wilkerson.