Force Majeure: How Arcane Law Could Make or Break Businesses in 2020

"Force majeure." The French term translates literally to "superior force," and, while the legal term may not be getting much ink in the first few months of the pandemic, this arcane legalese will likely become increasingly relevant to everyday investors as time goes on.

Often spoken of interchangeably as "act of God" provisions, force majeure clauses can free both parties in a contract from obligation or liability in circumstances beyond either party's control. This relief can be permanent or temporary.

Mergers and acquisitions, rental agreements, contracts in the entertainment industry and event planning space as well as purchase agreements -- these are a few of the areas in which companies' fates may increasingly rely on the language of force majeure clauses.

Typically, to credibly invoke this sort of "act of God" clause, qualifying events must be at least three things:

-- Outside the control of either party.

-- Unpredictable, or if it's predictable, then precautions should have been taken.

-- The event must make the fulfillment of the contract impossible or impractical.

Force Majeure at Play in 2020

Here's a look at some examples in 2020 in which the force majeure issue has played a large role:

L Brands' Victoria's Secret sale. L Brands (ticker: LB), the majority owner of Victoria's Secret, struck an agreement in February 2020 to sell off a majority stake to private equity firm Sycamore Partners. Although the contract contained a force majeure clause that would allow Sycamore to abandon the purchase under certain scenarios, a pandemic was, specifically, not one of them.

Not even three months later, Sycamore sought to scrap the $525 million deal, arguing that L Brands' decision to close U.S. stores, furlough staffers and skip April rent payments violated the agreement.

Because a pandemic was specifically excluded from the force majeure arguments Sycamore could make, some legal experts believed it had a good case to force the deal through anyhow.

The two parties briefly filed suits against each other before L Brands ultimately opted not to force Sycamore's hand, citing costly legal expenses in an already uncertain environment.

China embraces acts of God. The largest liquefied natural gas importer in China, China National Offshore Oil Corp. ( CEO), on the other hand, hasn't been shy about seeking to invoke force majeure. CNOOC cited the clause in early February as it sought to suspend multiple contracts with suppliers. The biggest suppliers of liquefied natural gas to CNOOC include Royal Dutch Shell ( RDS.A), Total ( TOT) and Woodside Petroleum.

The issue has been a hot topic in Chinese commerce more broadly speaking as well; through early March, the Chinese government had issued more than $53 billion in force majeure certificates to companies that had applied for them.

[See: 6 Companies That Could Go Bankrupt Sooner Than Later.]

While such certificates may end up holding water for contracts between two Chinese businesses, making such legal claims for international contracts will be a higher bar.

Airbus customer wishing it had a force majeure clause. The last example is a nightmare scenario of what can happen when certain outs aren't written into contracts -- when the unpredictable actually happens. It's also a prime example of why this obscure legal language will be top of mind in contracts written going forward, and why force majeure clauses may command higher premiums than they did in the past.

In 2013, the British discount airline EasyJet signed what looked to be a sweetheart long-term deal with Airbus to buy 135 planes. EasyJet touted the roughly $13 billion discount it had secured in the deal, which by some estimates was a 40% price cut.

In 2020, as EasyJet shareholders pressured the company to scrap its future purchases under the contract -- only 45 planes had been purchased, with another 90 under contract going forward -- the true price of that 40% discount became evident.

There was no relevant force majeure language to fall back on as the pandemic ravaged demand for air travel, and exiting the Airbus deal would require EasyJet to pay back all the discounts on previous purchases and compensate Airbus for losses incurred due to EasyJet's exit. Cancellation is not an option.

Expect Force Majeure to Take a Bigger Role Moving Forward

Companies will surely learn from EasyJet's expensive lesson, but in the meantime, industries will be facing major liquidity issues going forward because, on the other side of the coin, there is a force majeure clause in their contract -- one that could be invoked by their counterparty in the face of the pandemic?

Industries you'd think would have a lot of exposure might actually not, but that process has to play out and tends to be contract-specific.

[READ:Sign up for stock news with our Invested newsletter.]

That said, commercial real estate, which investors can invest in through commercial real estate investment trusts, may come to mind as an area in which the force majeure argument would increasingly arise. Physical commerce slowed to a crawl in recent months amid stay-at-home orders and government-ordered shutdowns due to the pandemic.

But not everyone thinks this pandemic argument will hold water.

"Everybody's asking this question. Most commercial tenants either want to get out of their lease or have grounds to renegotiate," says Pierre Debbas, partner and founding member of law firm Romer Debbas in New York City.

"The virus is not rendering the building unusable or damaged in any manner," Debbas says. "I'm very curious myself to see how a judge issues an opinion on that. I'm not very optimistic that those suits will carry a lot of weight."

The insurance industry is another area in which you'd naturally expect to see issues like this arise. But investors shouldn't automatically expect a wave of crippling claims to come in, says Ryen Rasmus, transactional practice lead at Lipp Law, which practices in Washington, D.C. and Virginia.

"On the insurance side, they get very granular and they're very specific with what qualifies," Rasmus says. The industry whose sole purpose is to price risk has generally gotten pretty good at it over the years, so the language tends to be careful enough to avoid devastating claim obligations that might otherwise arise.

"Hospitality almost always has a force majeure clause, but in many other industries, it's not the case," Rasmus says.

Rasmus sees the "act of God" argument as increasingly relevant in 2020 for contracts in a number of different industries -- from in-home health care and prepaid surgery to live performances, large conferences and event planning.

Both Rasmus and Debbas say that before going the legal route, the parties should simply come together and try to work something out. That said, both lawyers also anticipate a raft of upcoming litigation coming down the pike on this issue.

"I'll be honest with you: I'm anticipating a lot of lawsuits in the next six months on this topic with creative arguments trying to state that the pandemic has in fact shut down real estate, or tenants who occupy real estate," Debbas says.

[SEE: 7 of the Best Bargain Stocks to Buy During the Sell-Off.]

Rasmus too believes legal battles are brewing and explains there are two main reasons force majeure battles aren't yet playing out en masse.

"Especially when it comes to new lawsuits: A) the courts are shut down, so there's only a limited number of things you can do, and B) even if you did want to file a lawsuit, people don't want to throw money at it right now," Rasmus says.

But not every company will be as hesitant as an L Brands to use the wording of a force majeure clause in the courtroom.

"This kumbaya idea that everybody's out there working it out together, I just don't see that happening."