Do Marital Settlement Agreements Need a Force Majeure Provision?
The Legal Intelligencer (online Family Law column), April 2020
Pennsylvania Law Weekly, May 2020
Unless you have been living under a rock for the last four weeks, you know how COVID-19 has upended the nation. The very limited upside of the pandemic is that it is allowing divorce lawyers time to rethink the provisions in routine marital settlement agreements and consider whether we need to include a “standard” force majeure clause.
This occurred to me in a case where one party was to retrieve personal items within a certain time frame in the agreement. When I followed up with my client, they told me that the personal property had not been retrieved because the movers cancelled—the moving company had been closed as a nonessential service. This brought to mind other instances where agreements feature obligations that must be carried out in a set sequence and the impossibility of those action items under current circumstances.
At their heart, marital settlement agreements, which set forth the parties’ rights and obligations in a divorce, are contracts. Case law, again and again, emphasizes that these agreements should be treated in accordance with standard contract law, notwithstanding the relationship between the parties. However, most commercial contracts include a force majeure provision regarding performance. In my 10 years of practice, I have never encountered such a provision in any of the marital settlement agreements that I have reviewed or drafted, but current events prove that such a provision is prudent.
A force majeure provision is the standard language that you see in tiny print at the bottom of the cruise ship boilerplate email after you paid your nonrefundable deposit, or your iTunes acceptance box, or really any routine “I accept” click. It is also present in any commercial contract where there is a building or other benchmark required to trigger payments. This is the provision that says if an act of God occurs, the responsibilities of the contracting parties become null and void. The clause usually contains a list of these sorts of things—floors, riot, declaration of war, hurricane, shortage of toilet paper, famine, pestilence, typhoon, fire, flood or declaration by state and local authorities. OK, so no shortage of toilet paper, but you get the idea. The short answer is that, generally, parties do not want their rights to become null and void, even if something unanticipated happens. Going forward, practitioners should think about including a provision to address the timing of the obligations, and perhaps other provisions, in their marital settlement agreements.
Specifically, where there is an act of God, the time frames set forth in the within contract must be modified. I suggest that certain financial adjustments, like payouts over time, can and should be able to be revisited in very limited circumstances. For example, if the parties sign an agreement that provides for a buyout of real property, and the subject house is destroyed by fire before the refinance and buyout occur, it is reasonable for the agreement to allow for the parties to review the insured value of the house in light of the buy out. The burden for that act of God should not fall solely on one party, who is now homeless. Since insurance pays off any mortgage debt first, if the house is under-insured, one party may end up owing funds to the other based on the fair market value of a house that doesn’t exist, without funds to rebuild. In other words, if the parties owned the insurance policy together and it was underinsured, then there is no reason for only one of them to absorb the risk of the joint policy because of a slight question of timing. Likewise, if the house is overinsured, perhaps one party is not entitled to a windfall.
I am sure that every divorce attorney with agreements that include a retirement rollover for a specific amount lost some sleep when the stock market dropped 30% overnight. Financial risk is not considered an act of God, so a standard force majeure provision won’t help, but practitioners can include specific provisions to limit risks. My standard language for a Qualified Domestic Relations Order—or QDRO—is to set forth a certain sum as of a certain date, “plus or minus the investment experience from the date of the agreement to the date of segregation.” Simply put, the sum that my client is paying, or receiving, will track with the market. I’ve typically included that language because of the passage of time from when the agreement is completed until the QDRO is effectuated. However, I have two recent cases where opposing counsel insisted that a specific amount be transferred to each client, without any variance for the state of the market. For the last three years, this position was more favorable to their clients—the account holders—since the market only went up. In each instance, both of my clients agreed because they preferred to know exactly what amounts they would receive. In hindsight, both clients will now receive a greater share than anticipated, simply due to the timing and current market conditions.
To protect client interests, a good clause needs to be narrowly tailored, limited in time and clear as to the rights and portions encompassed. The provision must only apply to an unanticipated direct impact rather than indirect impact. If the marital residence burns to the ground, or a business is closed by government order, that might affect the distribution, whereas the indirect impact of an event on the stock market would not.
For practitioners who failed to include these provisions, the good news is that for a court to find a party in contempt, the party must have willfully failed to perform. If performance is impossible under current circumstances, it’s unlikely that the party will be found in contempt by a court. Moreover it will be nearly impossible for the other party to appear before a judge on this issue while the courts remain closed.
My new force majeure provision is not ready for its Hollywood debut, but I think that, not only will this sort of provision be required for best practices, but also will become a part of standard practice. If marital settlement agreements are contracts, shouldn’t we review them with a more critical transactional eye? It is now apparent that doing so will benefit both the practitioner and client.
Reprinted with permission from the May 5, 2020 edition of Pennsylvania Law Weekly and the April 30, 2020 edition of The Legal Intelligencer (online) © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited (contact 877-257-3382 or reprints@alm.com).
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