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Why Force Majeure is Impacting Alternative Investments to Industry Events

by Kate Stephany

Trigger warning: use of the phrase "unprecedented times." Remember precedented times? Yeah, me neither.

You were all set to go to that due diligence meeting or industry conference in March or April. Plane and hotel booked. Then, it all changed. I bet that until mid-March, you never thought about the term force majeure. Or tried to spell it (bless the god of spellcheck). Or heard it pronounced. If you had, it was years ago summarizing your law school contract professor's entire two-minute discussion as something like "boilerplate provision - FM = act of God - impossibility defense - rarely brought up - remember for the bar exam."

But now, yes, in these unprecedented times, I imagine you've descended into the force majeure clauses in most of your investment and daily contracts you never thought to read. Commercial leases and contracts, flight and hotel bookings, an Amazon order confirmation email. You were probably surprised that there wasn't one on the back of your shampoo bottle. No judgment here. We must get our light reading where we can get these days.

Now, I'm not going to talk about how to draft this clause, evoke this clause, how the clause may or may not interact with a business interruption insurance policy or the super sexy impossibility of performance doctrine. And you're welcome. That's heavy stuff, and I don't want your eyes glazing over while reaching for Part II of the bathroom trilogy Shampoo, Conditioner, Leave-in Conditioner: Final Defeat of the Frizz. No. I'm going to talk about how force majeure came to the United States, and why its journey may matter to you.

Legal history? Yep. Not as cool as medical history, I know. No gruesomely fascinating drawings, either. The good news is that since almost every jurisdiction interprets it slightly differently today, this is a general discussion and not an exhaustive lecture. No one's got time for that, and that's science. Thanks, smartphone.

Let's begin.

The Wibbly Wobbly Timey Wimey History Bit

Harp music and wavy pictures to show we're going WAY back in time.

Ancient Rome. Not as much white marble as the current Tourism Board would like you to believe, but if the statues are accurate, a city full of men's bare knees and curly hair that would fit right in on The Brady Bunch

Brace yourself: Latin ahead. But considering the term "force majeure" is French for "superior force," I've already exposed you to foreign languages without your knowledge. Ha!

Roman law was not really codified as we're used to but was mostly in the form of doctrines. Think of it more of the UK's constitution versus the US Constitution. The former is a collection of documents that interacts to make a whole, and the latter is one 7,591-word document, including signatures and amendments. See?

Two Roman doctrines were agreements must be kept (pacta sunt servanda) and things standing thus (rebus sic stantibus). Combined, they can be interpreted to mean that if circumstances of the contract have remained the same, the contract must be honored. Basic translation: if you say you're going to do something, do it.

Jumping now way forward to the 1800s, the French liberated these ideas (along with other things) from the Italian dust and made them their own. In the Napoleonic Code, the French decided that if a party to a contract is prevented from completing what it promised to do, it is not guilty of a breach if it was blocked "by consequence of a superior force or of a fortuitous occurrence."

The UK first discussed a contract not having a force majeure clause in 1863. (The UK was first? But we're an industrial power! Sure, but the US was a bit busy during that time, Civil War and all.) Taylor, an event promoter, contracted with Caldwell to rent out its music hall for a four-concert series paying rent on the day of each event. The concert hall burned to the ground a week before the first concert, and Taylor sued Caldwell for failure to rent it the music hall. The contract didn't have a force majeure clause but ended with the phrase "God's will permitting." I guess this was the closest thing at the time, due to the fact the court specifically called it out in the facts of the final ruling. The court reviewed the contract and determined that the purpose of the contract was for Taylor to use that specific concert hall as a particular part of the concerts. So, no concert hall, no contract. Both parties were excused because the specific set of circumstances contemplated in the contract couldn't be performed.

So how did it come to the US? Not through the Napoleonic Code, though it strongly influences one state's civil code. (Here's looking at you, Louisiana. Even though France sold you to the US in 1803, and the Napoleonic Code wasn't codified until 1804, after researching English common law, I get why you made your choice.)

The US Supreme Court first discussed force majeure in an 1883 case called, get ready for it, The Tornado.  What a great name for a case! Its full title is, with the original pagination:

The Tornado.

Ellis & Others v. Atlantic Mutual Insurance Company.

Not as sexy. It sounds like a movie where I must pay close attention. Possibly with subtitles.

Anyway, the Tornado was a cargo ship moored in New Orleans (Hi again, Louisiana!) that was supposed to take cotton to Liverpool, England. Before it could leave, the Tornado's hold caught fire. To put out the fire, the crew pumped water into the ship for two days. It sank to the bottom of the river next to the wharf and was declared salvage. The contract explicitly specified that the cotton was to go on the Tornado and that the ship be seaworthy. However, the contract didn't have a clause specifying what to do in a situation the Tornado couldn't sail. The Court ruled that because the Tornado was not seaworthy due to accidental fire, both parties were excused by applying the rule from Taylor v. Caldwell because the contract didn't have a force majeure clause, and the rest is history.

More harp music and wavy pictures to show we're back!

So, what does all this mean?

Well, since 1883, a lot of unprecedented times and hard stuff has hit the United States that has affected contracts and everything else. These include, but not limited to WWI, the Spanish Flu of 1918-1919, the Great Depression, WWII, Vietnam War, blackouts in New York City, fall of the Berlin Wall, AIDS, recessions, hurricanes, floods, tornadoes, creation of the European Union, September 11, 2001, protests, riots, and the first half of 2020. Each of these events not only changed the country, and its people, but has impacted the evolution of how force majeure clauses are drafted and interpreted in different jurisdictions. Mainly, US Courts still apply the rule of Tornado, but with modifications.

So maybe you've been trying to get a refund on a flight or hotel booking. Or, you're reviewing your investment platform and trying to determine how a portfolio's commercial office leases may perform, or if a sponsor can still collect rent should a store go dark or a restaurant not reopen. Any way you look at it, a force majeure clause is likely to impact you and your investments in multiple ways.

When you're drafting or interpreting a force majeure clause, take a bit of time to research the applicable state law for the contract. Does the state interpret a broadly written force majeure clause just a bit too broadly where almost anything could excuse the parties from a contract? What about if the provision lists specific events? Does the state limit the clause to just this list, or is the list considered non-exhaustive to allow for unprecedented and uncontemplated events? These are just thoughts to consider.

I now return you to finding your Zoom Shirt for the next meeting.

Kate Stephany

FactRight—Manager and Securities Attorney

kate@factright.com

612-284-5482

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