On March 18, 2020, New York Governor Andrew Cuomo issued Executive Order No. 202.6 mandating that any businesses not deemed “essential” must keep 100 percent of their workforce home. Any businesses that do not comply could face fines or enforcement measures. It also requires that all non-essential gatherings be canceled, and that anyone going outside maintain at least six feet of space between themselves and others. These and other measures enacted by local, state and federal government are certain to significantly affect the ability of parties in New York to perform contractual obligations. It will be particularly important in the coming weeks and months for individuals and businesses in New York to understand the contractual provisions and common law defenses that may be implicated by the response to COVID-19.
Relevant Contractual Provisions
When interpreting and construing contracts, New York courts look first and foremost to the plain language of the contract. As a result, whether you are seeking to enforce the other party’s performance on a contract or seeking to be excused from performing under a contract, you should look closely at all applicable provisions of the contract.
Termination Provisions
Depending on the text and context of the agreement, parties may have the ability simply to terminate the agreement for convenience, which will discharge the parties from all obligations under the contract except those that by their terms survive termination of the contract (usually, these surviving obligations relate to warranties and indemnities). Note that such termination rights usually require the terminating party to provide advance written notice to the non-terminating party prior to such termination becoming effective.
Force Majeure Provisions
“Force Majeure” clauses generally provide that a party who has been unable to perform under a contract due to the occurrence of certain unforeseeable and uncontrollable events may suspend, delay or avoid performance under a contract without liability. Typical force majeure clauses enumerate certain events that will be considered “force majeure events,” which often include strikes, work stoppages, acts of war or terrorism, civil disturbances, natural disasters and other “acts of God.” If the event in question is not specifically enumerated, a party may have to rely on a “catch-all provision,” which may provide that other unspecified events that are unforeseeable and/or outside a party’s control may also be considered force majeure events. “Pandemic” or “epidemic” are not commonly listed as force majeure events, and would therefore need to fall within the “catch-all provision” to be eligible for a claim of force majeure.
A claim to excuse performance due to a force majeure event is an affirmative defense. The party seeking the protections of the force majeure clause will bear the burden of establishing that: (1) the event in question caused the inability to perform and (2) the event in question qualifies as a force majeure event under the applicable clause of the agreement
Considering that the COVID-19 pandemic has resulted in a multitude of restrictions and prohibitions, parties seeking the protection of a force majeure clause may be able to identify several different “events” out of their control (e.g., pandemic, governmental prohibitions on public gatherings, mandates for “dine-out” only restaurant service). Since such events are unlikely to be specifically enumerated in the contract, the party seeking the protection of the force majeure clause will have to rely on a catch-all provision (if there is one). Whether the party will be able to establish the elements of a force majeure claim, and what its rights and remedies will be, depends on the precise wording of the force majeure clause.
Assuming that a party is entitled to relief on the basis of a force majeure clause, the next item to consider is the scope and duration of the relief available, and what the party must do to obtain this relief. Typically, a force majeure clause will allow a party to suspend its performance during the pendency of the force majeure event, provided that such party makes a good faith effort to continue to perform during the force majeure event, and begins required performance as soon as possible following the force majeure event. It is important to note that contracts often specifically exempt monetary obligations from those obligations that may be excused or delayed by force majeure. In such a case, a retail tenant may be able to delay its required opening date in connection with a force majeure event, but rent is still going to be due on the first of the month. In addition, force majeure clauses often include specific notice requirements, which must be complied with in order to trigger the applicable rights and remedies.
The COVID-19 pandemic may complicate a determination of when the force majeure event has ended, because even though certain local measures may be repealed, state and federal measures may remain in effect.
No New York court has examined a force majeure clause in the context of a pandemic, and New York courts in general have provided little guidance in determining whether this particular event should trigger a force majeure clause, except to recite the standard language that includes the word “epidemics.” Therefore, parties should bear in mind that the exact wording of the contract is crucial, and in the event of ambiguities in such wording, litigation may be necessary to resolve a dispute. Considering that the New York court system has curtailed its operations due to the COVID-19 pandemic, the availability of immediate relief may be limited.
If a contract does not contain a force majeure clause, the party seeking to excuse its performance may need to investigate other common law defenses.
Common Law Defenses
If a party seeking to avoid performance is not able either to terminate the agreement or to assert a force majeure clause as a defense, the party may still be able to assert certain common law defenses available in New York. Some of the defenses that are likely to be raised as a result of COVID-19 related events include: impossibility, impracticability and frustration of purpose. Each of these defenses may excuse a party’s breach of contract and serve as a means of avoiding liability for damages that result from the breach.
Generally, the defenses of impossibility, impracticability and frustration of purpose are applicable only to unexpected occurrences not contemplated by the parties at the time the contract was created and that are not otherwise addressed by provisions in the contract. [1]
The breaching party bears the burden of proving these defenses in court. The breaching party may seek to avoid liability for economic damages caused by the breach or, in some circumstances, it may wish to go one step further and ask the court for a remedy consistent with rescission, meaning that it would ask the court to put the parties back into the position they were in before entering the contract.
Impossibility/Impracticability
In New York, an impossibility defense can arise, after entering a contract, “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.” [2] Related to impossibility, impracticability may exist only when “the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible.” [3]
Unforeseen circumstances that cause performance to be more expensive (and commercially less profitable) than anticipated have not proven sufficient to excuse performance under an impossibility or impracticability defense. [4]
Some contracts may excuse performance based upon impossibility of performance resulting from an “act of God.” In the absence of a definition of an “act of God” in the contract, New York courts have defined such events as “those losses and injuries occasioned exclusively by natural causes, such as could not be prevented by human care, skill and foresight.”[5] Some courts applying New York law have relied on the Restatement 2d Contracts, § 261 which provides that “[w]here, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the nonoccurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.” [6] In the commercial context, UCC § 2-615 may excuse performance by a buyer or seller where a contingency impacts the ability of a party to get supplies necessary to fulfill a contract and the contingency makes performance more costly. However, increase in the price of raw materials, even if unanticipated, that makes performance unprofitable has been ruled not to allow performance to be excused. [7]
Frustration of Purpose
In addition to impossibility and impracticability, New York courts have recognized the doctrine of frustration of purpose to excuse performance on a contract. This defense focuses on whether events which materially affect the consideration received by one party for his performance. Both parties can perform but, as a result of the unforeseeable events, performance by one party would no longer give the other party what induced him or her to make the bargain in the first place. [8] Frustration of purpose is not only a defense to a claim of breach of contract, but can provide grounds for rescission. [9] Although the frustration of purpose defense is a narrow one and has not often proved successful in the New York courts, the unprecedented nature of the COVID-19 events may change that trend.
In summary, if you are seeking to enforce or avoid a contractual obligation in New York, you should carefully look for any provisions (including a force majeure clause) addressing future unexpected events such as an “act of God” or changes in governmental actions. If the contract does not provide otherwise, the extraordinary events related to COVID-19 may implicate common law defenses excusing a party’s performance or even resulting in termination of the contract entirely.
1. Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 519 N.E.2d 295, 296 (1987); 407 E. 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 244 N.E.2d 37 (1968).
2. Kel Kim, 70 N.Y.2d at 902, 519 N.E.2d at 296, 249.
3. Id.; Reed Found., Inc. v. Franklin D. Roosevelt Four Freedoms Park, LLC, 108 A.D.3d 1, 964 N.Y.S.2d 152 (1stDep’t 2013)
4. Id.
5. Tel Oil Co. Inc. v. City of Schenectady, 278 A.D.2d 571, 574, 718 N.Y.S.2d 410, 413 (3d Dep’t 2000)
6. In re Dayton Seaside Assocs. No.2, L.P.,257 B.R. 123 (Bankr. S.D.N.Y. 2000); See
Lowenschuss v. Kane, 520 F.2d 255, 265 (2d Cir. 1975).
7. Rochester Gas & Elec. Corp. v. Delta Star, Inc., 2009 WL 368508 (W.D.N.Y. 2009)
8. United States v. Gen. Douglas MacArthur Senior Vill., Inc., 508 F.2d 377, 381 (2d Cir. 1974).
9. Id.; Burke v. Steinmann, 2004 WL 1117891 (S.D.N.Y. 2004).
