If you
are a small business owner, this health crisis and the shutdowns makes rent
payments an issue. And many small businesses ask about the force majeure
clause.
Force
majeure means "superior force" and can be a clause in contracts that
essentially frees both parties from liability or obligation when an
extraordinary event or circumstance beyond the control of the parties, such as
a war, strike, riot, crime, plague, or an event described by the legal term act
of God (hurricane, flood, earthquake, volcanic eruption, etc.), prevents one or
both parties from fulfilling their obligations under the contract. In practice,
most force majeure clauses do not excuse a party's non-performance entirely,
but only suspend it for the duration of the force majeure.
For
example, here is one force majeure clause I consulted on regarding an event
contract:
“Neither Event Producer nor
Organization shall be held liable or responsible if the failure to perform the
services described herein arises out of causes beyond the control and without the
fault or negligence of either Event Producer or Organization. Such causes may
include but are not restricted to Acts of God or the public enemy, unlawful
acts, acts of the city in either its sovereign or contractual capacity, fires,
floods, epidemics, quarantine restrictions, strikes. freight embargoes and
unusually severe weather; but in every case the failure to perform must be
beyond the control and without the fault or negligence of Event Producer or
Organization. Force Majeure specifically excludes both financial inability to
perform and economic conditions, and does not excuse an obligation to make any
of the payments specified hereunder”
Certainly, the coronavirus would apply here as an epidemic
or quarantine restriction. Such a clause is typical in event contracts. But let
us deal with the issue at hand. You have a small business that is either
severely curtailed or shut down due to the Governor’s orders. No income and the
rent is due.
Not all
leases contain a force majeure clause. For example, The Association of the Bar
of the City of the City of New York, Committee on Real Property Law, Model New
York City Retail Lease does not contain such a clause. Instead, section 23.3
provides:
Neither Landlord nor Landlord’s
managing agent, if any, shall be liable for any injury, damage or loss to
Tenant, Tenant’s Property, Tenant’s Work, Tenant’s business or to any other
person or property resulting from any cause, except to the extent caused by the
negligence or willful misconduct of Landlord, Landlord’s managing agent, if
any, or their respective employees, agents or contractors, subject to Section
13.4.
And section 23.8 of the model form provides:
Tenant’s obligations shall not be
waived, delayed or otherwise affected in any manner, and Landlord shall have no
liability, if Landlord is unable to comply with, or is delayed in complying
with, any of Landlord’s obligations under this lease by reason of any strike,
labor trouble, accident, war, government action, Laws or other cause beyond
Landlord’s control.
But some leases do contain a force
majeure clause. Commercial landlords and tenants should closely review their
lease documents to determine (1) whether, and to what extent, the COVID-19
events, declarations and restrictions qualify as a force majeure performance
excuse under the applicable lease, and (2) any applicable requirements for
providing notice of nonperformance under that lease.
The
question I am being asked by both landlords and tenants is whether the force
majeure provisions will excuse the timely payment of rent. Recently, in the
NYLJ article, “Analyzing Force Majeure Clauses in Light of the Coronavirus
Outbreak”, Justin T. Kelton.
NYLJ March
19, 2020, the author noted:
““Generally, a force majeure event
is an event beyond the control of the parties that prevents performance under a
contract and may excuse nonperformance.” Beardslee v. Inflection Energy, 25
N.Y.3d 150, 154 (2015) (citation omitted). Force majeure clauses excuse
non-performance where the reasonable expectations of the parties have been
frustrated due to circumstances beyond their control. See Kel Kim v. Cent.
Mkts., 70 N.Y.2d 900, 902, (1987); United Equities v. First Natl. City Bank, 52
A.D.2d 154, 157 (1976), affd. 41 N.Y.2d 1032 (1977). Under New York law, force
majeure clauses are “to be narrowly construed.” Reade v. Stoneybrook Realty, 63
A.D.3d 433, 434 (1st Dept. 2009).
Moreover, New York courts impose a
significant hurdle on a party seeking to assert a defense of force majeure:
“only if the force majeure clause specifically includes the event that actually
prevents a party’s performance will that party be excused.” Reade, 63 A.D.3d at
434 (citing Kel Kim Corp. 70 N.Y.2d at 902-903). Where the parties to a written
agreement do not include a force majeure clause, there is no basis for such a
defense. See General Electric Company v. Metals Resources Group Ltd., 293
A.D.2d 417 (1st Dept. 2002) (“The force majeure doctrine is no more helpful to
defendant. The parties integrated agreement contained no force majeure
provision, much less one specifying the occurrence that defendant would now
have treated as a force majeure, and, accordingly, there is no basis for a
force majeure defense.”).
As is the case with all contractual
provisions, New York courts interpreting a force majeure clause seek to
effectuate the parties’ intent. “[W]hen the parties have themselves defined the
contours of force majeure in their agreement, those contours dictate the
application, effect, and scope of force majeure.” Route 6 Outparcels v. Ruby
Tuesday, 88 A.D.3d 1224, 1225 (3d Dept. 2011). Therefore, courts interpreting a
force majeure provision seek to determine, inter alia, the intended breadth and
scope, and whether the clause was designed to protect one party, or both. Id.
(finding that clause was “expansive in scope” and “affords protection to both
plaintiff and defendant”).”
The most
recent Court of Appeals case involving a lease was Beardslee v. INFLECTION,
LLC, 25 NY 3d 150 - NY: Court of Appeals 2015, but the court was deciding the
obligations under an oil and gas lease. The court first noted that the Force
Majeure clause had to be construed in accordance with regular contract
principles:
“Under New York contract
jurisprudence, the intent of the parties controls and if an agreement is
"complete, clear and unambiguous on its face[,] [it] must be enforced
according to the plain meaning of its terms" (Greenfield v Philles
Records, 98 NY2d 562, 569 [2002]). As this Court has indicated on numerous
occasions, "[c]ourts may not `by construction add or excise terms, nor
distort the meaning of those used and thereby make a new contract for the
parties under the guise of interpreting the writing'" (Riverside S.
Planning Corp. v CRP/ Extell Riverside, L.P., 13 NY3d 398, 404 [2009], quoting
Reiss v Financial Performance Corp., 97 NY2d 195, 199 [2001]). Moreover, the
analysis should take into account that oil and gas leases "stand on an
entirely different basis from any other leasehold agreements" (Conkling v
Krandusky, 127 App Div 761, 766 [4th Dept 1908], citing Eaton v Allegany Gas
Co. [Ltd.], 122 NY 416 [1890]). Such leases are "made in the context of a
highly technical industry, which employs distinct terminology used by those in
the business" (Wiser, 803 F Supp 2d at 117). For these reasons, an
agreement for the production of oil and gas must be construed with reference to
both the intention of the parties and the known practices within the industry (see
generally 3 Howard R. Williams & Charles J. Meyers, Oil and Gas Law §§ 601,
603, 605 [2003 ed]; 1, 2 W.L. Summers, The Law of Oil and Gas, chs 7, 10, 11
[Perm ed 1959]).”
(emphasis supplied)
In this
case, the court was construing the effect of the leases term clause, also known
as a habendum clause, which establishes the primary and definite period during
which the energy companies may exercise the drilling rights granted by the
leases. The energy company tenant argued that the term was extended under the
force majeure clause because of the governor’s executive order delaying
fracking permits. What is noteworthy is:
1. The
court did not address the question of whether the State's Moratorium amounted
to a force majeure event.
2. The
court did hold that under any force majeure event, the force majeure clause did
not modify the habendum clause and extend the primary terms of the lease:
“The habendum clause in the leases
does not incorporate the force majeure clause by reference or contain any
language expressly subjecting it to other lease terms (see Wiser, 803 F Supp 2d
at 121 ["where . . . the language of the habendum clause clearly makes
that provision `subject to' other provisions in the agreement. . . the life of
the lease may be subject to modification"]; see also Sun Operating Ltd.
Partnership v Holt, 984 SW2d 277, 286 [Tex App 1998]). Moreover, the language
in the force majeure clause stating that "the time of such delay or
interruption shall not be counted against Lessee" does not refer to the
habendum clause with specificity. Thus, the habendum clause is not expressly
modified or enlarged by the force majeure clause.”
In fact, the court stated:
“Our holding is consistent with
out-of-state "oil" jurisdictions, in which courts, applying similar
contract principles, have held that language identical or similar to the force
majeure clause at issue here cannot extend the primary term set forth in the
habendum clause (see Gulf Oil Corp. v Southland Royalty Co., 496 SW2d 547, 552
[Tex 1973]; see also San Mateo Community Coll. Dist. v Half Moon Bay Ltd.
Partnership, 65 Cal App 4th 401, 412, 76 Cal Rptr 2d 287, 293 [1998]; Natural
Gas Pipeline Co. of Am. v Zimmer, 447 F Supp 66, 70 [ND Tex 1977], affd 576 F2d
106 [5th Cir 1978]; cf. Sun Operating Ltd. Partnership v Holt, 984 SW2d 277, 282-283
[Tex App 1998]). And, as observed by our sister courts, had the energy
companies intended for the habendum clause to be subject to other provisions of
the contract, they could have expressly so indicated (see Kirker v Shell Oil
Co., 104 Cal App 2d 497, 503, 231 P2d 905, 909 [1951]).”
So, it appears that the mere presence of a force majeure
clause does guarantee an excuse of performance – it is a question of contract
interpretation utilizing the regular rules of contract interpretation such as
(1)
unambiguous provisions of a contract
must be given their plain and ordinary meaning, and the interpretation of such
provisions is a question of law for the court as gleaned from the four corners
of the document itself, provided that its terms are clear and unambiguous and
(2) whether an agreement is ambiguous presents a question of law for the Court and ambiguity exists when specific language in
the contract is susceptible of two reasonable interpretations. Other arguments
that attorneys have discussed include contract principles of impracticality of
performance, frustration of purpose as well as unconscionability. Thus the small business owner may have these questions:
1. Question: Should a tenant be
aggressive and start an action on the issue of rent? A commercial lease was involved in LIDC I, LLC
v. SUNRISE MALL, 46 Misc. 3d 885 - NY: Supreme Court 2014. The tenant sought to
Yellowstone
[1]
the landlord’s default notice for non-payment stemming from delays in
construction of three restaurants plaintiffs planned to open in defendant's
shopping center as a result of the Town’s stop work order. The injunction was
denied. The court stated that it found that “the Town's actions were sufficient
to invoke the force-majeure clause as a result of governmental action…However,
it also finds that rent is excepted under the leases' force-majeure clause, and
nonpayment of rent is the stated default “ Thus, the court held that the tenant
“have no operating businesses generating income, and have not pointed to any
other independent source of funds, or that access to sufficient funds to cure
the rent default is imminent. The court accordingly finds that they have failed
to satisfy that prong of the required showings for a Yellowstone injunction
that they are prepared and have the ability to cure the rent default.
(Definitions Personal Fitness, Inc. v 133 E. 58th St. LLC.) The application for
such an injunction is therefore denied.”
2. Question:
Should a tenant be wait until a non-payment is proceeding?
There is a moratorium on evictions that for
now extends to mid-June. And under the June 2019 Act, commercial tenants may
have the benefits of the new provisions regarding notice and payment up to
judgment. But see 41 E. 11th ST., LLC v. WSIP REALTY CORP., 2020 NY Slip Op
20017 - NY: City Court, Civil Court 2020:
“Certainly there are provisions of
the act that implicate both residential and commercial tenancies (see eg RPAPL
§ 711(2) which changed rent demand from five days to 14 days), however, there
is no reason for the courts to widen the scope of this specific provision aimed
at residential tenancies to commercial tenancies that involve sophisticated
parties in business transactions. The reluctance of courts to assert themselves
in such transactions was recently reaffirmed by the Court of Appeals when the
court declined to rule a provision in a commercial lease waiving the right to a
declaratory judgment as unenforceable. The court held
"In keeping with New York's status
as the preeminent commercial center in the United States, if not the world, our
courts have long deemed the enforcement of commercial contracts according to
the terms adopted by the parties to be a pillar of the common law. Thus,
"[f]reedom of contract prevails in an arm's length transaction between
sophisticated parties. . ., and in the absence of countervailing public policy
concerns there is no reason to relieve them of the consequences of their
bargain" (Oppenheimer & Co. v Oppenheim, Appel, Dixon & Co., 86
NY2d 685, 695 [1995])."
159 MP Corp. v. Redbridge Bedford,
LLC, 33 NY3d 353, 359, reargument denied, 33 NY3d 1136 (2019). The court
concluded that "(e)ntities like those party to this appeal are
well-situated to manage their affairs during negotiations, and to conclude
otherwise would patronize sophisticated parties and destabilize their
contractual relationships...".
Given the fact that RPL § 235-e
refers specifically to residential tenancies and not to commercial tenancies,
given the clear intent of the Housing Stability and Tenant Protection Act of
2019 to extend protections to residential tenants and the general policy of
this state to allow commercial transactions without undue interference, the
court finds that RPL § 235-e(d) is not applicable to commercial tenancies and
respondent's first and only affirmative defense is dismissed.”
3.
Question: What do other attorneys recommend? Here are some thoughts and
opinions I received that came from various list serves, etc.:
A. “1. Do I Have Any Rights To Stop Paying Rent?
The truth is, every lease is different. Your lease may have specific provisions
for circumstantial deferred rent or rent abatement during times of material
business interruption. Many companies have business interruption insurance for
this reason, but to date this Coronavirus pandemic is not being covered as such
by most insurance carriers. If you do have these provisions in your lease, you
should speak to your landlord about exercising these rights. If you don’t, we would recommend the
following. 1. ask your landlord for 3-6
months of rent abatement now that will then be tacked on to the end of your
lease. 2 ask your landlord for 3-6 months of rent abatement, with higher rent
in the months following so they are made whole over a period of time.
2.
How Do I Communicate With My Landlord? Do you Help with that? Now is the time
to communicate with your landlord. Landlords are humans, too—yes they have to
work within their cash flow confines too, but they understand this pandemic as
much as anyone else and value communication and cooperation. Step one is to review and
understand your current lease and what rights you have within that. Step two is
to strategize on how to communicate with your landlord. Step three is to open a
dialogue with your Landlord and come to a solution that benefits you now when
you need it most.
3.
Should I talk to an attorney? Do you have a recommendation? Before you plan and
communicate with your landlord, you want to make sure you really understand
your rights within your lease, and your rights as a tenant given the multiple
Executive Orders and policy changes around rent payments and Landlord / Tenant
relationships. Many real estate attorneys we have spoken to are happy to do a
legal review off the clock at no cost to you in the hope.
B. And other suggestions:
“1. The
only possible solution I could think of other than deferring payments would to
advise that there is a moratorium on evictions but say that you are serving
predicate notice(s) anyway. I think it would be important not to acknowledge
that the landlord is holding off out of good will, because that could vitiate
the predicate notice.
2. In
2008 and 2009, a lot of landlords were working with tenants, so I suspect
something similar, but most of that happened within the context of nonpayment
proceedings. Giving people rent credits now seems a little premature. The courts and eviction proceedings might be
up and running by May 2020. So if you need to start a case in May just to work
out a payment plan, that makes more sense for landlords. A commercial tenant
asking for a 3 month concession when restaurants/bars have been closed for a
week seems a bit opportunistic to me.
3. "Force
majeure"
4.
What
the tenant offered to your client is very fair.
What I have been telling clients to do (and which I have done with the
one property I manage) is to defer the rent until life begins to return to
normal and then have a frank discussion with the tenant about extending the
lease or allowing the tenant to pay the deferred rent over the balance of the
lease term or possibly forgiving it under the right circumstances. From a
practical standpoint, it pays the landlord to be accommodating and perhaps
build some good will.
For all intents
and purposes the landlord would not be able to default of evict the tenant for
a longtime so it pays to be nice.“
ADDITION TO ABOVE:
See the dissent in Belgium v. Mateo Prods., Inc., 138 AD 3d
479 - NY: Appellate Div., 1st Dept. 2016:
“KLT moved for summary judgment
dismissing plaintiff's breach of contract claim based on the contract's force
majeure clause, which it raised as an affirmative defense. The clause states:
"If ARTIST is unable to perform in the event of sickness or accident then
this will be considered `Force Majure' [sic] by ARTIST and ARTIST shall not be
subject to any liability ... Monies will be returned for any nonperformance
that is not covered under the scope of force `Force Majure' [sic]."
"The purpose of a force
majeure clause is to limit damages in a case where the reasonable expectation
of the parties and the performance of the contract have been frustrated by
circumstances beyond the control of the parties" (United Equities Co. v
First Natl. City Bank, 52 AD2d 154, 157 [1st Dept 1976], affd 41 NY2d 1032
[1977]). "[W]hen the parties have themselves defined the contours of force
majeure in their agreement, those contours dictate the application, effect, and
scope of force majeure" (Route 6 Outparcels, LLC v Ruby Tuesday, Inc., 88
AD3d 1224, 1225 [3d Dept 2011] [internal quotation marks omitted]).
On its motion for summary judgment,
KLT bore the burden of establishing its force majeure defense (see Latha Rest.
Corp. v Tower Ins. Co., 285 AD2d 437 [1st Dept 2001]; see also Phillips Puerto
Rico Core, Inc. v Tradax Petroleum Ltd., 782 F2d 314, 319 [2d Cir 1985]). As
the majority finds, KLT did not sustain its burden in that it failed to submit
any objective evidence to substantiate Akon's self-serving claim that he was
unable to perform due to sickness, such as the hospital records of his alleged
visit to an emergency room where he claimed he was given antibiotics and
painkillers, even though those records were exclusively within the control of
Akon and KLT, which is solely owned by Akon.
Nevertheless, the majority finds
that plaintiff did not satisfy its burden of proof on its cross motion because
it failed to establish that Akon was able to perform or that he was not unable
to perform due to sickness. On the record before us, I cannot agree. As shown
below, plaintiff's submissions established its prima facie entitlement to summary
judgment and Akon failed to produce any objective evidence supporting his force
majeure defense, including the aforementioned medical records relating to the
alleged treatment of the condition that purportedly rendered him too sick to
perform.”
ANOTHER ADDITION:
Some attorneys have suggested some language in current
agreements:
One attorney was faced with this clause in a service
agreement:
“I hereby, on behalf of myself and
___________________________________________________(“Contractor”) make the
following representations and warranties to _______________________________ and
the Owner of the Premises: that throughout the duration of any work conducted
at the Premises by the Contractor and its subcontractors:
1.
Neither I, nor anyone else to be or hereafter engaged at the Premises thru the
Contractor or employed by the Contractor, have been in any of the following
countries within the last 14 days:
China, S Korea, Japan, Italy, Iran, and any other country or area of the
United States reported by the Centers for Disease Control
(https;//ww.cdc.gov/coronavirus/2019-ncov/index.html) as having "widespread
sustained" or "sustained community" spread of the coronavirus
like New Rochelle.
2. Neither
I, nor anyone else to be engaged at the Premises thru the Contractor or
employed by the Contractor, have had close contact with anyone who has been in
one of the countries or locations listed above within the last 14 days;
3. Neither
I, nor anyone else to be engaged at the Premises thru the Contractor or
employed by the Contractor, have been directed to quarantine, isolate, or
self-monitor at home for COVID--19 by any doctor, hospital or health agency;
4. Neither
I, nor anyone else to be engaged at the Premises thru the Contractor or
employed by the Contractor, have been diagnosed with or have had close contact
with anyone diagnosed with COVID-19, and
5. Neither
I, nor anyone else to be engaged at the Premises thru the Contractor, have or
had flu-like symptoms now or within the past 14-days.
Contractor acknowledges and agrees
to (i) immediately notify Property Manager of any change in circumstance that
should render any of the above representations and warranties untrue or false
in any respect during the course of the work conducted by the Contractor at the
Premises, and (ii) that Contractor shall
restrict and remove any person engaged
at the Premises thru the Contractor or employed by the Contractor from the
Premise who shall cause the Contractor to violate the above representations.”
One attorney has suggested the following for sale of land:
“Seller and Purchaser agree that
the Coronavirus (COVID-19) pandemic is impacting real estate transactions,
transaction related service providers and consumers. There is a possibility
that transaction related service providers such as lenders, title/abstract
companies, appraisers, home inspectors and attorneys may be providing limited
or no services as a result of COVID-19 issues. COVID-19 issues may include, but
are not limited to: emergencies declared by the government, travel
restrictions, mandatory closures or reduction of staff at transaction related service
providers, quarantine, exposure to or contraction of COVID-19.
If a COVID-19 issue should arise
making compliance with the terms of the Contract impossible or improbable as a
result of such COVID-19 issue, the Seller and Purchaser agree to the following
modifications of the Contract:
1. Seller and Purchaser agree to
extend all deadlines in the Contract by ____ Days after the end of the COVID-19
issue (Extension Date). Should the COVID-19 issue continue _____ Days after the
closing date set forth in the Contract, Seller and/or Purchaser has the right
to terminate the Contract. Such termination must be made in writing to the
other party and other individuals/entities requiring notice using the same
method(s) of notice as contained in the Contract.
2. OPTIONAL ☐
If checked: Purchaser and Seller agree, notwithstanding that Purchaser may have
removed their financing contingency, that if Purchaser is unable to fund their
loan and close due to Purchaser’s loss of
income from a COVID-19 issue, then Seller and/or Purchaser has the right to
terminate the Contract. Such termination must be made in writing to the other
party and other individuals/entities requiring notice using the same method(s)
of notice as contained in the Contract.
3. In the event that the Contract
is terminated under Paragraph 1 or 2, the Deposit shall be returned to the
Purchaser.
4. Other:
_____________________________________________________________________________________________
____________________________________________________________________________________________________
All other terms and conditions of
the Contract remain in full force and effect. Dated:
_______________________________________”
[1]
The court noted: “A Yellowstone injunction is intended to maintain the status
quo so that a commercial tenant, threatened by a termination of its lease, can
protect its leasehold investment by obtaining a stay tolling the cure period
and avoid a forfeiture of its lease. (Graubard Mollen Horowitz Pomeranz &
Shapiro v 600 Third Ave. Assoc., 93 NY2d 508 [1999]; Barsyl Supermarkets, Inc.
v Avenue P Assoc., LLC, 86 AD3d 545 [2d Dept 2011].) In order to qualify for
the injunction, the tenant must demonstrate that (1) it holds a commercial
lease, (2) it received a notice of default, a notice to cure, or a threat of
termination of the lease, (3) it made its request for the injunction prior to
both termination of the lease and the period to cure, and (4) it is prepared
and has the ability to cure the alleged default by any means short of vacating
the premises. (Graubard; Barsyl Supermarkets, Inc.; see also Trump on the
Ocean, LLC v Ash, 81 AD3d 713 [2d Dept 2011].)
The required showings are less stringent that what is
required for a preliminary injunction (Trump on the Ocean), and a demonstration
of probable success on the merits is not a prerequisite for relief.
(WPA/Partners v Port Imperial Ferry Corp., 307 AD2d 234, 237 [1st Dept 2003].)
However, all the required showings must be made, including the ability to cure
a rent default, if that is the basis of the landlord's action against the
tenant, or the injunction will be denied. (Definitions Personal Fitness, Inc. v
133 E. 58th St. LLC., 107 AD3d 617 [1st Dept 2013].)”
NOTE AS OF MARCH 30, 2020: This discussion was recently sent to me: Re: impossibility of performance:
Contract
Law: The COVID-19 Shutdown and the
Impossibility of Performance Defense
As
we are all painfully aware, Governor Cuomo has issued an Executive Order
directing that all “non-essential” businesses statewide terminate their
in-office personnel functions. In
addition to the public health and policy issues that arise from this Order, a
myriad of legal questions also follow.
While there are no concrete answers to many of these questions given the
unprecedented nature of the COVID-19 pandemic, it is helpful to look to caselaw
to anticipate how these issues may play out in the business disputes that are
sure to emerge from this situation. One
such issue is the applicability of the defense of impossibility of performance
that may be asserted against a party seeking to enforce its contractual rights
against another party that has failed to perform its obligations.
General
contract law in New York (and most places) provides “that once a party to a
contract has made a promise to perform, it must follow through or be liable for
damages, even when unforeseen circumstances make that performance burdensome.”[i] The defense of impossibility of performance
has been typically applied very narrowly in light of the view that a contract,
when distilled down, is really just an arm’s length allocation of risks between
the parties.[ii] As a result, the Court of Appeals has
recognized that this defense should only be available in “extreme
circumstances” and “only when the destruction of the subject matter of a
contract or the means of performance makes performance objectively impossible.”[iii] In addition, the event that produced the
impossibility must not have been something that could have been foreseen or
guarded against in the contract.[iv]
In
a general sense, the COVID-19 pandemic was not foreseeable to parties that
entered into contractual agreements through most of 2019. However, can the same be said about contracts
that were entered into after the first case of COVID-19 was reported in China
around December 31, 2019 or after the first case was reported in the United
States around January 21, 2020?[v] These questions will undoubtedly have to be
answered by the courts as businesses become unable to perform their contractual
obligations as a result of the COVID-19 pandemic and the ensuing
governmentally-ordered restrictions.
One
case resulting from a governmental act occurred in Orange County, New York when
the purchaser in a sale of real property contract attempted to rescind the
contract after the relevant jurisdiction enacted a moratorium on subdivision
approvals and then enacted a revised zoning code that prohibited the type of
subdivision contemplated in the agreement.[vi] The Appellate Division, Second Department
affirmed the trial court’s dismissal of the action and held that it was not
unforeseeable that the town would change its zoning code in a manner rendering
the planned subdivision impossible.[vii] The court partially relied on its holding in an
earlier case that found that sophisticated developers should either anticipate
such a change or guard against it in the terms of the underlying contract.[viii]
Similarly,
when a prospective purchaser attempted to use the impossibility of performance
defense based on the loss of nearly of all of his personal assets as a result
of the Bernie Madoff scandal, the court found that the default should not be
excused and that the seller was entitled to retain the purchaser’s down payment
as liquidated damages for the breach.[ix]
In
a case concerning an executive order, the Appellate Division, First Department
dealt with a company that had purchased insurance against an air traffic
controller’s strike that would disrupt its necessary distribution chain.[x] The policy provided that there would be no
liability to the carrier unless the strike continued for seven days.[xi] When a strike eventually occurred, it was unforeseeably
terminated by declaration of President Reagan firing all of the air traffic
controllers three days after the strike began.[xii] Although the court found that there have been
circumstances where governmental acts have truly made performance impossible,
and that there was no way that the company could have reasonably anticipated
that the President would end the strike by firing all of the air traffic
controllers, the facts here did not constitute a sufficient impossibility of
performance defense.[xiii] Instead, the court relied on a strict
interpretation of the contractual provision as written: three is less than
seven.[xiv]
This
is not to say that there is not law to support the use of the defense when an action
truly renders performance impossible.
The Appellate Division, First Department also dealt with a
transportation company that had contracted with the City of New York to
furnish, among other things, tugboat services for sanitation barges.[xv] Subsequently, there was a portwide strike and
there was no practical way for the company to provide the contracted for
tugboat services to the City.[xvi] As a result, the court found that the
transportation company may not be liable to the City for its failure to provide
the services as result of the impossibility of its performance and it reversed
the trial court’s grant of summary judgment in favor of the City.[xvii]
Finally,
in a case arising from the tragedy that took place on September 11, 2001, a
court held that the untimely cancellation of an African safari could be excused
by the impossibility of performance defense based on a claim that timely communicating
the cancellation from Staten Island was impossible in the immediate aftermath
of the terrorist attacks.[xviii]
Ultimately,
the underlying facts leading to the assertion of an impossibility of
performance defense will be determinative as to its potential success. It seems clear that the financial
consequences of the COVID-19 pandemic will not, standing alone, be enough to
excuse performance. However, if the
performance is truly rendered impossible by the closure of a business that
cannot operate as a result of the Governor’s stay-at-home order, then it may be
possible that contractual performance will be excused, or, at the very least,
the time to perform tolled until performance is no longer impossible.
[i]
See Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902
[1987].
[iv]
See id. (citing, inter alia, 407 E. 61st
Garage v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275 [1968]).
[vi] See RW Holdings, LLC v. Mayer,
131 A.D.3d 1228, 1229 [2d Dep’t 2015].
[viii] See id. (citing Pleasant
Hill Developers, Inc. v. Foxwoods Enters., LLC, 65 A.D.3d 1203, 1206 [2d
Dep’t 2009]).
[ix] See Sassower v. Blumenfeld,
24 Misc.3d 843, 845-46 [Sup. Ct. Nassau County 2009].
[x] See Metpath Inc. v. Birmingham
Fire Ins. Co. of Penn., 86 A.D.2d 407, 408 [1st Dep’t 1982].
[xiv] See id. at 413-414.
[xv] See City of N.Y. v. Local 333,
Marine Division Int’l Longshoreman’s Assoc., 79 A.D.2d 410, 411 [1st Dep’t
1981].
[xviii] See Bush v. ProTravel Int’l,
Inc., 192 Misc.2d 743, 7753-754 [Sup. Ct. Richmond County 2002].
2]."
