Many contracts are being pulled out for review to ascertain how COVID-19 affects them. I have received some preliminary inquiries and briefly address the topic here.
Contractual force majeure, or “acts of Gd,” provisions found in a contract are a specific variation of a party’s inability to perform due to performance having been rendered impossible. Because establishing a claim of impossibility sufficient to release a party from its contractual obligations is difficult, establishing force majeure claims are challenging as well.
In one Court of Appeals case, where a property owner’s literal inability to procure sufficient insurance ended in the landlord declaring a default, the court upheld the default, explaining:
Generally, once a party to a contract has made a promise, that party must perform or respond in damages for its failure, even when unforeseen circumstances make performance burdensome; until the late nineteenth century even impossibility of performance ordinarily did not provide a defense (Calamari and Perillo, Contracts § 13-1, at 477 [2d ed 1977]). While such defenses have been recognized in the common law, they have been applied narrowly, due in part to judicial recognition that the purpose of contract law is to allocate the risks that might affect performance and that performance should be excused only in extreme circumstances.
Impossibility excuses a party’s performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.
For much the same underlying reason, contractual force majeure clauses — or clauses excusing nonperformance due to circumstances beyond the control of the parties — under the common law provide a similarly narrow defense. Ordinarily, only if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused.
Kel Kim Corp. v. Cent. Mkts., Inc., 70 NY 2d 900, 902-03 (1987).
Specifically, as to excusing obligations due to a force majeure provision, the court will look to the items listed by the parties in their agreement and, perhaps, to similar incidents, but generally will not read the provision expansively. If the contract has no such provision, a court will not read one in. Additionally, financial hardships, even those that are caused by a force majeure-listed event, will likely not excuse a party’s performance (shutting down a plant voluntarily due to financial considerations brought about by environmental regulations was not circumstances constituting a force majeure event). Unless an event creating an impossibility occurs—which could not have been foreseen—the party’s obligations will not be excused.
It should be noted that when these claims are asserted as a defense, the failure to mitigate damages will certainly be held against that breaching/non-performing party.