The recent COVID-19 pandemic and related control measures by the federal, state and local governments have given rise to many questions from our clients concerning force majeure clauses in contracts. A force majeure clause allocates the risk of unforeseen supervening events that were not contemplated by the parties when they entered into the business relationship or transaction. Generally, force majeure events include acts of God, natural disasters, epidemics, terrorism, government actions, embargos, labor strife and other events that disrupt an otherwise stable and functional business relationship.

In an effort to reduce the uncertainty that arises from a force majeure event, parties will often negotiate force majeure clauses to account for unforeseen circumstances. A properly drafted force majeure clause will not be disrupted by the courts.

Unfortunately, many contracts lack force majeure clauses and the failure to prepare for force majeure events leaves the impacted party without relief. For example, and with respect to the COVID-19 pandemic, during the negotiation of the lease it is not likely that a business owner and landlord would have anticipated that the government would order the quarantine of citizens and closure of certain businesses.

So, what happens if a contract does not have a force majeure clause?  In the absence of such clause (or an improper clause) the courts will look into the foreseeability of the force majeure event to determine enforceability.  Courts will also use implied covenants or “gap-fillers” to achieve an equitable result.  The most relevant gap fillers to this discussion are impossibility of performance and frustration or purpose.  “Impossibility of performance” kicks in when it is impossible for a party to perform.  An example of this would be the death of a consultant in an independent contractor agreement.  Courts have lightened the burden and instead of possibility now only require that a party show performance is commercial impracticable.  In most states, parties are not responsible if events arise which could not have been reasonably foreseeable by the parties.

“Frustration of Purpose” is where performance is possible, but the performance would be worthless.  A supplier’s performance would be worthless if a contractor who had ordered supplies is barred by unforeseen circumstances that prevented the contractor from purchasing those supplies (i.e. a government steps in an requires the contractor to not use the supplies in a project after they are ordered).

Another “gap-filler” that is not obvious is the concept of mitigation of damages.  The failure to mitigate damages can in some cases afford the breaching party with an affirmative defense.  Mitigation of damages requires a wronged party to take reasonable measures to reduce the amount of harm suffered.  Where a commercial lease either has a force majeure clause that excuses performance but not payment or where there is no force majeure clause at all, does a landlord have a duty to act in good faith and negotiate a rent abatement if requested by a tenant upon a force majeure event?  Does this mitigation of damages imply that a landlord has a duty to work with a tenant if the tenant requests a rent abatement in light of a quarantine of forced closure?

We are advising clients to review their contracts carefully and to consider attempting to negotiate with other parties in good faith in advance of any potential issues to avoid problems in the future with payment or performance.  Without a doubt, in a time such as this, it is important that every business owner review contracts and leases in anticipation of a potential prolonged effect on their business.