October 13th, 2022 – Jonathon D. Nelson, General Counsel for Dedicated Financial GBC
The coronavirus (COVID-19) has undoubtedly changed the ways in which we interact with others and create relationships. Businesses that find themselves strapped for cash are more likely than ever to assert the force majeure defense to excuse their performance of a contractual obligation, and to seek termination of the contract itself, where their performance becomes impossible due to the force majeure event (i.e., COVID-19).
If there is a force majeure clause in a contract at-issue, it should be carefully read to proactively determine whether a business could successfully weaponize the clause as an affirmative defense in an action commenced by a lender. See e.g., JN Contemp. Art LLC v. Phillips Auctioneers LLC, 29 F.4th 118, 124 (2d Cir. 2022) (NY law requires narrow construction); Kahala Franchising, LLC v. Real Faith, LLC, 2022 U.S. Dist. LEXIS 91420 (C.D. Cal. May 20, 2022) (focusing on language in the clause). It should be noted that business asserting the force majeure defense bears the burden of proving that the force majeure event occurred, and that the event is the reason they cannot perform their contractual obligation.
That business may also be required to mitigate the effects of the force majeure event depending on the law applicable to the contract. See e.g., Gulf Oil Corp. v. F.E.R.C., 706 F.2d 444 (3d Cir. 1983) (a party using a clause to excuse its nonperformance must show steps taken to avoid the event’s occurrence or minimize its effects performance); Am. Gen. Corp. v. Cont’l Airlines Corp., 622 A.2d 1, 11 (Del. Ch.1992) (“While there is a general duty to mitigate damages if it is feasible to do so, a plaintiff need not take unreasonably speculative steps to meet that duty.”), aff’d, 620 A.2d 856 (Del. 1992).
Know your contracts. Know the businesses with whom you contract. Act in good faith. Keep those three principles in mind when considering whether to commence an action in this day and age.