Market Conditions/Force Majeure Can Protect Companies in Tax Incentive Agreements

COVID 19 is having a dramatic impact on many company’s plans for job growth and capital investment. Thousands of these companies have gained local and state economic development tax incentives which have a tax incentive agreement that award tax credits, tax abatements, loans and/or grants. However, in exchange for those public sector tax incentives, the private companies must make a commitment to create jobs and often a capital investment.

Black Swan events like COVID 19 are a major disruption to job creation and capital investment plans even for successful companies. COVID 19 will disrupt the job creation and capital investment plans that companies have committed to in a binding local and/or state economic development incentive agreement. However, well-crafted economic development incentive agreements may have a way to address a COVID 19 based disruption to a company’s job creation and capital investment without harming the company even further.

Many economic development agreements contain a “Market Conditions and Other
Factors” provision that gives the government or economic development organization partner the ability to keep the incentive agreement in place if the company does not meet its economic development commitments due to factors outside of their control. “Market Condition” clauses have their roots in the common law legal concept known as Force Majeure. Force Majeure gives the ability of parties to a contract to be excused from their obligations when certain circumstances arise beyond the party’s control making performance inadvisable, commercially impracticable, illegal, or impossible. Force Majeure is triggered through a contract provision that list the extreme events such as epidemics or pandemics, along with war, terrorist attacks, “acts of God,” famine, strikes, and fire in the list of events excusing overall performance or delay in performance.

Economic development incentive agreements may give the local and state economic development officials the ability to relieve the company impacted by dramatic events outside of their control from the job creation and capital investment commitments. This flexibility is critical as many economic development incentive agreements permit local and state governments to “claw back” tax incentives previously awarded or terminate the tax incentive agreement even though the company may well pick up economic production following the dramatic event. Local and state government officials deciding whether to avoid tax incentive penalties for a company under a Market Condition or Force Majeure clause may ask a couple key questions:
⦁ Does the company believe it will survive the event and recover following the event?
⦁ Is there another company in place to implement the economic commitments of the company; and
⦁ What is the impact of any federal, state or local regulatory requirements imposed on company or their project.

Communication is the key to successfully utilizing a Market Condition or Force Majeure clause in an economic development agreement. Corporate site location consultants or competent legal counsel can help negotiate good results for clients that with local and state economic development leaders who are focused on helping company succeed.