FOR THIS HEALTH CRISIS - SMALL BUSINESSES HAVE RENT ISSUES

               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].

[ii]  See id.

[iii] See id.

[iv]  See id. (citing, inter alia, 407 E. 61^st Garage v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275 [1968]).

[v] See <https://www.nytimes.com/article/coronavirus-timeline.html>

[vi] See RW Holdings, LLC v. Mayer, 131 A.D.3d 1228, 1229 [2d Dep’t 2015].

[vii] See id.at 1230.

[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].

[xi] Id. at 409-410.

[xii] Id. at 408.

[xiii] See id. at 411-413. 

[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].

[xvi] Id. at 413. 

[xvii] See id. at 414.

[xviii] See Bush v. ProTravel Int’l, Inc., 192 Misc.2d 743, 7753-754 [Sup. Ct. Richmond County 2002].

2]."