Are standard force majeure clauses enough?

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2 The tenant may negotiate to include language that prevents an occurrence occasioned by landlord s negligence, willful actions, or breach of contract as being recognized as a force majeure. The tenant can also insist that, notwithstanding the occurrence of the force majeure event, landlord make a good faith effort to perform its contractual obligations, or may insist upon rent abatement until the situation is rectified. In addition, force majeure clauses may be superceded by the use of a casualty clause that allows a commercial tenant to quit and surrender possession of its rental space, and be relieved from further rent obligations, when its space is rendered untenantable or unfit for occupancy for longer than a certain period. Are standard force majeure clauses enough? Most lawyers have reviewed force majeure clauses with renewed interest since Sept. 11. And while it has been a frequent change to add acts of terror to the enumerated events, it is worthwhile examining why reliance on the phrase act of war is misplaced in the event of a terrorist attack. President George Bush generally refers to the events of Sept. 11 as an act of war and our subsequent actions as part of a war on terror. Despite President Bush s description of the attacks, the United States was not itself at war at the time of the attacks. Additionally, there is significant case law developed over the past 25 years (mostly in the insurance law area) indicating courts will narrowly construe the phrase act of war to mean hostilities between entities with significant attributes of sovereignty. Indeed, we commonly think of war as occurring between nations, rather than as something propelled by a group of insurgents. Courts have also rejected the acts of guerilla groups as acts of war for insurance purposes. Acts performed by a group of terrorists, rather than a sovereign entity, is probably not an act of war. This means that the act of war exception to performance of contract obligations is likely not applicable to acts of terrorism. There are also other events enumerated in force majeure clauses that most likely will not excuse performance of contract obligations due to terrorist attacks. Courts examining their meaning in insurance cases have in fact not broadly interpreted words such as insurrection and hostilities, which seem rather generic and prone to broad interpretation. Courts have interpreted the term hostilities as narrowly as the term war. And courts have interpreted insurrection as a violent uprising for the specific purpose of overthrowing the existing government. Violence without suchintent, regardless of whether achievement of the intended purpose was realistic or not, will not suffice as an insurrection. Again, these standard force majeure events may not be applicable to acts of terrorism. Drafting changes The simplest, and most often made, change to standard force majeure provisions is to include acts of terrorism as an enumerated force majeure event. The phrase acts of terrorism may be further qualified by adding the language whether actual or threatened. Expanding the definition of terrorism to include threatened acts of terrorism is helpful to clients since false alarms are nearly as prohibitive to the flow of business as the actual attacks. Making the

3 threat of terrorism a force majeure event also allows clients to err on the side of safety (for example, closing shop for a number of days following a bomb or biological scare to completely search a building) rather than risk the lives and well-being of employees due to the potential threat of lawsuits if a contract is not completed on time. The term terrorism has become a household word for U.S. citizens since Sept. 11, but it is not a word which has been interpreted and subject to judicial scrutiny. Without the additional comfort of judicial interpretation, it may be necessary to broaden force majeure provisions beyond the addition of an acts of terrorism phrase. Another phrase that has emerged more frequently in force majeure provisions is acts of a public enemy. It may also be possible to provide clients with protection by adding the phrase or other causes similar to those enumerated at the end of the list of force majeure events. This catch-all phrase should help capture events that are related to the type of events specified but which defy exact definition. A corollary of the terrorist attacks has been the threat of biological warfare; stories of the proliferation of anthrax dominated the headlines for weeks after Sept. 11 and the fear of other biological and radioactive threats loom. We have learned of businesses being evacuated and mail and machinery being quarantined while testing is performed to evaluate the biological risks to humans. As a result of the changing face of warfare, the terms epidemics and quarantines may also be appropriate additions to the list of enumerated force majeure events. Leases and force majeure and casualty clauses For landlords and tenants alike one of the greatest risks might not be a catastrophic loss like the World Trade Center, but rather a smaller attack that contaminates a building thus rendering it briefly unusable and forever undesirable. At one extreme, the tenant can bear all the risk associated with this scenario. This would be the outcome if the lease only contained an up-to-date force majeure provision and no casualty clause excusing the tenant in the event the space becomes unfit. At the other extreme, the landlord can bear significant risks. For example, the New York/New Jersey Port Authority risked significant liability after the 1993 World Trade Center attack. Some tenants sought to invalidate the Port Authority s force majeure defense to non-performance based on an exception to the force majeure clause for a party s negligence, willful actions or breach of contract. The tenants contended based on a 1986 security report that the Port Authority was on notice about possible car and truck bomb risks. Its prior notice of such risks opened the Port Authority to a credible claim of negligence for not taking better precautions. Although a court did not ultimately decide the theory advanced by the tenant in this landlord/tenant dispute, it serves as a reminder that in our changed world, every landlord is on notice for a wide range of terrorist activities. Tenants can protect against such risks by insisting upon inclusion of a well-drafted casualty clause. In leases, a casualty clause allows a tenant to surrender possession of its space, and be relieved of paying further rent, when its space is rendered unusable. A casualty clause should cover (a) how soon after a casualty event the determination will be made

4 regarding whether the leased space is unusable, and (b) how long will be allowed for reconditioning of the leased space before the tenant may break the lease. Depending on the type of business a commercial tenant engages in, the triggers for a casualty clause may need to be drafted to address the particular needs of the tenant. Tenants who use leased space to produce products intended for consumption are a special case. They may benefit from a casualty clause that permits them to vacate the lease if conditions affect, or threaten to affect, the integrity of the product. Such a clause may be particularly helpful due to the threat of biological warfare scares. Other contract changes Force majeure provisions are not the only contract provisions that are being reexamined in light of the increased terrorist threats. Material adverse change provisions in purchase agreements are also being revisited. Material adverse change (MAC) provisions provide an escape hatch for a potential acquirer, allowing it to pull out of a contemplated transaction if certain material adverse changes occur between the signing of the contract and the closing of the purchase. The potential usefulness of MAC clauses was highlighted in certain high profile transactions following the Sept. 11, 2001 terrorists attacks. One of those transactions involved USA Networks Inc., which had agreed in July 2001 to merge with National Leisure Group, Inc., a cruise and vacation company. After the terrorist attacks USA Networks sued National Leisure in an attempt to void their proposed merger. USA Networks claimed that the Sept. 11 terrorist attacks, as well as National Leisure s loss of a large client, had triggered the material adverse change clause contained in their merger agreement. The lawsuit would have provided the first judicial interpretation of whether the terrorist attacks are justification for ending a merger pursuant to a material adverse change clause. At the end of October 2001, USA Networks agreed to settle the suit. The week prior to settlement, National Leisure s sales rebounded to pre-attack levels and it was expected that National Leisure would post a large percentage gain over its year 2000 sales. It has been speculated that National Leisure s gain in sales may have prompted USA Networks to settle the dispute, since a high-profile Delaware case from earlier in 2001 held that a material adverse change clause is not triggered by a temporary decline in business. In its Oct., 10, 2001 edition, the Wall Street Journal reported that investment bankers and law firms alike have expanded their material adverse change clauses to include such events as acts of terrorism and stock exchange closures within the category of events that allows a party to walk away from a deal without liability. More recent articles from other sources have reported the continuing trend of broadening force majeure and MAC provisions. Conversely, some commercial sellers are insisting that these events be explicitly identified as the types of events that will not allow a buyer to renege on the deal. In the arena of real property purchases, prospective purchasers of sensitive locations may want their material adverse change clause to be expanded to take into account the discovery or threatened

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