Overview
For additional guidance, please refer to Steptoe's COVID-19 Resource Center.
The coronavirus pandemic is affecting every facet of New York life. The state and local governments are restricting travel, work, and gathering to contain and delay the virus. Federal, state and local governments are issuing and modifying orders every day. In just two examples, Mayor de Blasio recently ordered the closure of malls containing more than 100,000 square feet of retail space and of all places of public amusement,[1] and Governor Cuomo ordered 100% of nonessential employees to work from home.[2] Schools, restaurants, theatres, stadiums, and other public venues are closed. As infections, quarantines and absences grow and government restrictions evolve, businesses are finding it difficult, and in some cases impossible, for them to perform their contracts.
Many of our business clients want to know if the health and economic crisis, and resulting government restrictions, permit them or their counterparts to terminate or restructure contract commitments. One of the strengths of a common law system is that judges can react to new situations in a way not available to their civil law counterparts. Consequently, the law in this area will surely evolve as the crisis continues. Below we set out some general guidelines based on current New York law that will likely guide these new developments.
The basic principles that may support excusing performance are force majeure, impossibility, frustration of purpose, and, in sale of goods contracts, impracticability. Caution is advised. The New York courts have traditionally applied these doctrines narrowly. Given the uncertainty surrounding the impact of the virus, and the extent of the governmental restrictions (the Governor's Order is entitled "Temporary"), it is important that businesses carefully evaluate their options before either seeking to excuse their own performance or reacting to a claim by a contract counterpart.
Force majeure provisions may offer refuge in specific instances
Contract force majeure clauses typically excuse performance when the parties' ability to perform is upset by "an extreme and unforeseeable occurrence" beyond the party's control.[3] Contract parties are free to define force majeure as they see fit. The New York courts have interpreted force majeure provisions sparingly: a party's nonperformance will be excused "only if the force majeure clause specifically includes the event that actually prevents a party’s performance."[4] Thus, the contract language is crucial.[5] Many force majeure clauses omit illness, pandemic or epidemic from the triggering events. Many force majeure clauses specifically state that even a qualifying event does not excuse payment obligations. A court may also require that the clause explicitly refer to government action before the new restrictions can trigger relief. A well-drafted clause will permit nonperformance only for the duration of the crisis. These factors may render most force majeure clauses of little help in the current crisis.
Some force majeure provisions contain catchall language, such as "or any other event beyond the parties' control making it impossible to perform their obligations under the contract." However, the New York courts have generally interpreted such catchall provisions to include only events of "the same general kind or class as those specifically mentioned."[6]
Even if a force majeure provision covers coronavirus, that does not end the inquiry. The party invoking force majeure must also prove that the event was unforeseeable[7] and actually prevents performance.[8]
Finally, the party which invokes force majeure must comply with contract notice requirements. Due to the extreme nature of the right, many force majeure provisions require immediate notice of nonperformance. But note that under certain circumstances, the courts are permitted to excuse a party's failure to give a contractual notice.
If force majeure is unavailable, other doctrines may apply
Even absent a force majeure clause, the common law doctrines of impossibility, frustration of purpose and failure of consideration may excuse performance. Sellers in sale of goods contracts may also be able to rely on the defense of impracticability.
Impossibility
The doctrine of impossibility excuses a party's contract performance when an unforeseen and unanticipated event makes performance objectively impossible.[9] As with force majeure, the courts apply the doctrine narrowly.[10] Performance is not excused "if the difficulties that … make performance impossible reasonably could have been foreseen by the promisor when the parties entered into contract."[11] New York courts are hesitant to apply common law doctrines like impossibility to excuse nonperformance where the parties could have allocated the risk of a foreseeable event in the contract.[12]
One noted commentator on New York contract law states: "The doctrine of impossibility may provide a defense where unforeseen government action prevents the performance of a contract."[13] In one case, a court excused a fabric supplier from performing under a supply contract where the government requisitioned all cloth materials to meet wartime needs.[14]
However, New York law is also more stringent than many other jurisdictions because it requires that performance be objectively impossible.[15] Proving objective impossibility due to coronavirus is probably easiest if a government restriction directly prevents performance. Where the restriction has an indirect effect, a party may have difficulty persuading a New York court that the doctrine is applicable.
It remains to be seen if the current government restrictions meet the requirements of New York law for excuse. The temporary and partial nature of the restrictions will affect this analysis. The longer the crisis, the more restrictive the government’s response, and the closer such events are tied to contractual failure, the more likely such claims will succeed.
Frustration of Purpose
Frustration of purpose is another common law doctrine that may excuse performance. It applies "when a change in circumstances makes one party's performance virtually worthless to the other, frustrating his purpose in making the contract."[16] As is the case with related doctrines, the New York courts have applied frustration of purpose narrowly.[17]
To excuse nonperformance, the frustration must be "substantial."[18] It must go to the core of the parties' agreement: "the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense."[19] To determine whether the frustration goes to the core of the contract, courts look at the plain language of the underlying contract.[20]
Like impossibility, the "non-occurrence of the frustrating event must have been a basic assumption on which the contract was made,"[21] and the frustrating event must have been unforeseeable.[22] Unlike impossibility or force majeure, where the performance must be rendered objectively impossible, the doctrine of frustration can apply where no actual impediment to performance exists.[23] In other words, frustration may be easier to invoke than impossibility or force majeure if the invoking party can prove that the frustration is central to the parties' agreement.
An area where frustration may be applicable is in contracts for hotel and conference facilities. A government restriction on travel or meeting size arguably frustrates the core of such agreements.
Failure of Consideration
Failure of consideration is a final doctrine that may come into play. Where the good bargained for becomes worthless, or so altered as to be of little value, a court may excuse the party harmed from its contractual obligations. Precedent exists for basing a failure of consideration on a change in law.[24]
Impracticability Defense for Sale of Goods Contracts
Sellers under sale of goods contracts may able to excuse the inability to deliver all or some of the goods with the impracticability defense set forth in Uniform Commercial Code §2-615. The defense requires the breaching seller to show "(1) a contingency (2) the impracticability of performance as a consequence of the occurrence of that contingency, and (3) that the nonoccurrence of the contingency was a basic assumption of the contract."[25]
Section 2-615 may be invoked when the seller experiences "a marked increase" in the cost of supplies or where the seller cannot obtain supplies due to a "a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like …."[26] Thus, if governmental restrictions are shutting down the supply of raw materials or driving up the materials' prices significantly, a seller may be able to rely on this section to excuse partial performance or nonperformance.
The defense is qualified by duties to notify and mitigate. The breaching seller must (1) notify buyers "seasonably" of the delay or non-performance and (2) where partial performance is available, allocate the partial production among customers under contract and regular customers not under contract in a way that is fair and reasonable to avail itself of the defense.[27]
Conclusion
While the principles we discuss above may allow parties to excuse nonperformance due to the coronavirus crisis, ultimate resolution of these issues will depend on the specifics of the contracts and the facts in each case, and developments in case law, executive orders and legislation. In the meantime, measured and principled negotiation between contract parties to reach interim solutions is probably the best response.
[1] Emergency Executive Order No, 102, March 20, 2020
[2] Executive Order No. 202.7, March 19, 2020; https://www.governor.ny.gov/news/governor-cuomo-signs-new-york-state-pause-executive-order
[3] Team Mktg. USA Corp. v. Power Pact, LLC, 41 A.D.3d 939, 942, 839 N.Y.S.2d 242, 246 (2007)
[4] Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 902, 519 N.E.2d 295, 296 (1987) (citing United Equities Co. v. First Natl. City Bank, 41 N.Y.2d 1032, 395 N.Y.S.2d 640, 363 N.E.2d 1385)
[5] Constellation Energy Servs. of New York, Inc. v. New Water St. Corp., 146 A.D.3d 557, 558, 46 N.Y.S.3d 25, 27 (N.Y. App. Div. 2017) (“[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”).
[6] Team Mktg. USA Corp. v. Power Pact, LLC, 41 A.D.3d 939, 942-43, 839 N.Y.S.2d 242, 246 (2007) ("When the event that prevents performance is not enumerated, but the clause contains an expansive catchall phrase in addition to specific events, 'the precept of ejusdem generis as a construction guide is appropriate'—that is, 'words constituting general language of excuse are not to be given the most expansive meaning possible, but are held to apply only to the same general kind or class as those specifically mentioned'") (quoting Kel Kim Corp. v. Central Mkts., 131 A.D.2d 947, 950, 516 N.Y.S.2d 806 [1987], aff'd. 70 N.Y.2d 900, 524 N.Y.S.2d 384, 519 N.E.2d 295 [1987]).
[7] Goldstein v. Orensanz Events LLC, 146 A.D.3d 492, 493, 44 N.Y.S.3d 437, 438 (N.Y. App. Div. 2017) ("Thus, the clause must be interpreted as if it included an express requirement of unforeseeability or lack of control.").
[8] See § 77:31.Force Majeure clauses, 30 Williston on Contracts § 77:31 (4th ed.) ("An express force majeure clause in a contract must be accompanied by proof that ... in spite of skill, diligence, and good faith on the promisor's part, performance remains impossible or unreasonably expensive."); see also Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 902, 519 N.E.2d 295, 296 (1987) (noting that force majeure will excuse nonperformance for events that actually prevent performance);
[9] Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 902, 519 N.E.2d 295, 296 (1987); see also § 77:95.Frustration of purpose, 30 Williston on Contracts § 77:95 (4th ed.) (the defenses of impossibility of performance and frustration of purpose are not available "if the difficulties that frustrate the purpose of contract or make performance impossible reasonably could have been foreseen by the promisor when the parties entered into contract ... if the event was reasonably foreseeable, the parties should have negotiated contract terms addressing its occurrence ...").
[10] Reed Found., Inc. v. Franklin D. Roosevelt Four Freedoms Park, LLC, 108 A.D.3d 1, 7, 964 N.Y.S.2d 152, 156 (2013).
[11] § 77:95.Frustration of purpose, 30 Williston on Contracts § 77:95 (4th ed.).
[12] See e.g., Warner v. Kaplan, 71 A.D.3d 1, 6, 892 N.Y.S.2d 311, 315 (2009) (declining to apply common law doctrines of impossibility or frustration of purpose "where the event which prevented performance was foreseeable and provision could have been made for its occurrence").
[13] Banks, New York Contract Law § 20:8 citing RW Holdings, LLC v. Mayer (2016).
[14] Crown Embroidery Works v. Gordon, 190 A.D. 172. 180 N.Y.S. 158 (1920).
[15] Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 902, 519 N.E.2d 295, 296 (1987).
[16] PPF Safeguard, LLC v. BCR Safeguard Holding, LLC, 85 A.D.3d 506, 508, 924 N.Y.S.2d 391, 394 (2011) (quoting Restatement (Second) of Contracts § 265, Cmt. a).
[17] Crown IT Servs., Inc. v. Koval-Olsen, 11 A.D.3d 263, 265, 782 N.Y.S.2d 708, 711 (2004).
[18] Crown IT Servs., Inc. v. Koval–Olsen, 11 A.D.3d 263, 265, 782 N.Y.S.2d 708 [2004] (citing Restatement (Second) of Contracts § 265 (1981)); PPF Safeguard, LLC v. BCR Safeguard Holding, LLC, 85 A.D.3d 506, 508, 924 N.Y.S.2d 391, 394 (2011.
[19] Crown IT Servs., Inc. v. Koval–Olsen, 11 A.D.3d 263, 265, 782 N.Y.S.2d 708 [2004] (citing Restatement (Second) of Contracts § 265 (1981)); PPF Safeguard, LLC v. BCR Safeguard Holding, LLC, 85 A.D.3d 506, 508, 924 N.Y.S.2d 391, 394 (2011.
[20] PPF Safeguard, LLC v. BCR Safeguard Holding, LLC, 85 A.D.3d 506, 508, 924 N.Y.S.2d 391, 394 (2011).
[21] Restatement (Second) of Contracts § 265, Cmt. a.
[22] Warner v. Kaplan, 71 A.D.3d 1, 6, 892 N.Y.S.2d 311, 315 (2009) ("the doctrine of frustration of purpose ... is not available where the event which prevented performance was foreseeable and provision could have been made for its occurrence").
[23] Restatement (Second) of Contracts § 265, Cmt. a.
[24] City of New York v. Long Island Airports Limousine Service Corp., 96 A.D. 998, 467 N.Y.S. 93, order aff'd, 62 N.Y.2d 613 (1984).
[25] Dell's Maraschino Cherries Co. v. Shoreline Fruit Growers, Inc., 887 F. Supp. 2d 459, 478 (E.D.N.Y. 2012).
[26] N.Y.U.C.C. § 2–615, off. cmt. 4.
[27] N.Y.U.C.C. § 2-615(b), (c).
