On May 5, 2020, The New York Times (NYT) reported under the heading “Here come the busted deals,” that L Brands, majority owner of Victoria’s Secret, who had a seemingly airtight case for selling a majority stake in Victoria’s Secret, had agreed to let the buyer, Sycamore Partners, walk.

L Brands agreed to let Sycamore walk away, even though it had a strong argument to enforce the agreement made in February 2020. Sycamore had argued that the coronavirus outbreak led to irreparable damage to Victoria’s Secret, but the merger agreement actually anticipated the concept of a pandemic and excluded pandemics as a reason for walking away from the deal. Yes, the merger agreement allowed for the voiding of the deal due to an “act of God,” but in the acquisition agreement, the lawyers carved out specific exceptions to those acts of God, including a pandemic. That meant that even if a pandemic struck, Sycamore would be legally obligated to complete the deal.

Why let the buyer walk? According to L Brands’ incoming chair, Sarah Nash, it is better to focus on dealing with the coronavirus “rather than engaging in costly and distracting litigation.” As reported by the NYT, neither side will pay termination fees.

We have seen the failure of other recent force majeure (FM) clauses tested in the court. But in those cases – Pacific Collective LLC v. ExxonMobil Oil Corp., Complaint, No. 20STCV13294 (Cal. Sup. Ct. Filed Apr. 3, 2020); E2W LLC v. Kidzania Operations S.A.R.L., No. 1:20-cv-02866 (S.D.N.Y. Filed Apr. 6, 2020); and Palm Springs Mile Associates Ltd. v. R&R Goldman Associates Inc., No. 1:20-cv-21656-XXXX (S.D. Fl. Filed Apr. 6, 2020) – none of the provisions mentions epidemics, contagion, or stay-at-home orders, leaving the parties to argue over whether COVID-19 is a “disaster” or an “act of God”– terms more frequently invoked for earthquakes, floods, and fires – or whether social distancing and other restrictions are mandatory “governmental orders or regulations.”

So what does this tell us about FM clauses in consent agreements with governmental agencies in the future?

Most consent agreements with governmental agencies in the pre-pandemic world had standard form boilerplate language regarding FM.

These form consent agreements will be changing in the post-pandemic world – or at least there will be an opportunity to push for change going forward.

What kind of change? We know from the above that if you don’t have precise contract language, FM clauses are not successful. And we know from the L Brands lesson that even if an agreement does contain precise language to address what the parties’ obligations are in a COVID-19-like pandemic in the FM, the parties can choose to ignore it.

So, is there any way to draft a consent agreement with a governmental agency to address the regulated entity’s obligations, such that the regulated entity will have a reasonable “out” if (or when) a pandemic happens again?

In the past, FM language in typical government consent agreements was basically ignored – not a point subject to much negotiation. Now more than ever, drafting FM clauses demands more careful consideration. Going forward, a well-drafted FM provision in consent agreements with governmental authorities will likely include:

  • Specific language regarding triggering events that are bespoke to the parties, the regulatory violations, the actions at issue, and the industry. Broad phrases like “act of God” or “events not reasonably within [the parties’] control,” are unlikely to be successful going forward. Although our experience with Environmental Protection Agency and Department of Justice attorneys (and state counterparts) is that they strive to stick to a form so that they do not get caught up in the case-by-case nuances, if there ever were a case for nuances, it is on this issue, given recent experience. Parties therefore should spend time considering the full panoply of bad events that a particular client in a particular industry may someday face.
  • Specific language to address events that are not triggering events for FM. Parties should consider whether either party is particularly suited to anticipate and mitigate any catastrophic events and should outline the parties’ obligations should that particular event occur.
  • Specific explanation of the impact of FM on other consent agreement obligations. Parties should have the contract answer questions like: Does invoking the FM clause excuse the non-invoking counterparty (governmental agency) from performing its own obligations? Does FM excuse or allow changes to the stipulated penalties for late or unfilled deliveries? Does the FM address extensions of deadlines, notice periods, or reporting?

Happy drafting in the post-pandemic marketplace!

Following up on previous posts regarding force majeure, please see here.