COVID 19: Force Majeure, Impossibility and Frustration of Purpose under New York Law
On March 9, when there were approximately 142 confirmed cases of Covid-19 in New York state and the restaurants were filled with patrons, the parties in Aguilar v. NYC Sable Inc., No. 19-CV-07135 (S.D.N.Y. 2019) entered into a settlement agreement in connection with Plaintiff’s overtime claim pursuant to the Fair Labor Standards Act. Three days later, on March 12, Governor Andrew Cuomo announced restrictions on mass gatherings and prohibited events with more than 500 people. Three days after that, Governor Cuomo ordered the closure of all restaurants and bars in New York City (except for takeout).
On March 20, the defendant restaurant in Aguilar requested that the payment date under the settlement agreement be pushed back to late April due to the alleged decimation of its business resulting from the state-mandated restaurant closures and social-distancing regulations. Plaintiff’s counsel argued that Defendant should not be able to use the fallout from the Covid-19 pandemic to unravel a duly executed agreement between the parties. The Court rejected Defendant’s application holding that “defendants have not made a showing that the settlement agreement is invalid and have not provided an adequate legal basis upon which the Court may modify the agreement.” (ECF No. 23)
Although the Court did not expressly address the several doctrines available to a party to excuse performance of an agreement in extraordinary circumstances, which are addressed below, the Aguilar decision nevertheless illustrates the difficulty parties may have in voiding contractual obligations due to the current crisis. As Covid-19 continues to interrupt business operations throughout the country, companies may find it difficult or impossible to satisfy their contractual obligations. Under these conditions, parties to an agreement should consider possible assertions of force majeure, impossibility and frustration of purpose defenses. It should be noted that these doctrines are highly fact specific and depend on the particular contract language and governing law (this memo addresses the doctrines under New York law).
Force Majeure
Under New York law, a party may excuse contractual performance upon the occurrence of “force majeure” events by including express provisions in their agreement. A force majeure event is one beyond the control of the parties and one that prevents performance under a contract and may excuse nonperformance. Typical force majeure events may include so-called “acts of God” such as earthquakes, work-stoppages, and the like. Beardslee v. Inflection Energy, LLC, 8 N.Y.S.3d 618, 619–20 (2015). Contractual force majeure clauses provide a narrow defense. Kel Kim Corp. v. Central Markets, 70 N.Y.2d 900, 902–03 (1987). Ordinarily, only if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused. Id. For example, a force majeure clause that excuses performance in the event of an “outbreak” or “work stoppage” may not be sufficiently specific to adequately address the Covid-19 pandemic. Likewise, catch-all phrases such as “any event beyond the party’s control” may not be enforceable and will not capture unforeseen events, such as a pandemic, which should be expressly enumerated. New York Courts will only enforce a force majeure clause if the subject event was not only specified in the contract, but was also unforeseeable at the time the agreement was entered into.
Parties are likewise free to preclude force majeure events as a defense to full performance by specifically providing so in their contract. Chase Manhattan Bank v. Traffic Stream (BVI) Infrastructure Ltd., 86 F.Supp.2d 244, 258–59 (S.D.N.Y. 2000) (reversed on other grounds). If the contract at issue does not contain a force majeure clause, there is no basis to assert a force majeure defense.
Impossibility
In the event the parties have not included a force majeure provision in their contract, there are still defenses available under New York common law to excuse performance. The doctrine of impossibility refers to an inability to perform as promised due to intervening events, such as an act of state or other events which may even be similar to force majeure events. The doctrine comes into play where (1) the contract does not expressly allocate the risk of the event’s occurrence to either party (i.e. there is no force majeure clause) and (2) to discharge the contractual duties (and, hence, obligation to pay damages for breach) of the party rendered incapable of performing would comport with the customary risk allocation. U.S. v. General Douglas MacArthur Senior Village, Inc., 508 F.2d 377, 381 (2d Cir. 1974). The vitiation of a contract based upon impossibility of performance is rarely imposed and will be applicable only in those circumstances when the destruction of the subject matter or the means of performance makes performance objectively impossible. Lagarenne v. Ingber, 273 A.D.2d 735, 737 (3d Dept. 2000). Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract. Id. Thus, a defendant may have difficulty asserting the impossibility defense where the contract was entered into at a time when the risks for Covid-19 were anticipated and foreseeable.
The defense of impossibility is not available to a party who created the impossibility or for a party who did not take virtually every action within his or her power to perform. U.S. v. International Broth. of Teamsters, Chauffeurs, Warehousemen and Helpers of America, AFL-CIO, 816 F. Supp. 864, 874 (S.D.N.Y. 1992). That performance may be more difficult or costly than anticipated does not excuse nonperformance. Boccardi v Horn Const. Corp., 204 A.D.2d 502, 503 (2d Dept. 1994).
The doctrine of impossibility is implicated where performance is forbidden or prevented by law or decree or administrative action in that location. In re Flag Telecom Holdings Ltd., 320 B.R. 763, 771 (Bkrtcy. S.D.N.Y. 2005). Thus, state-mandated closures or stay-at-home orders in response to Covid-19 might give rise to an impossibility defense. However, where the impossibility of performance is only temporary, the impossibility suspends performance but does not excuse it when the impossibility is removed. Finally, mere “economic hardship” is generally not sufficient to excuse performance of a contract pursuant to the impossibility defense.
Frustration of Purpose
Distinct from the doctrine of impossibility, frustration of purpose is another defense to contractual performance and focuses on events which materially affect the consideration received by one party for his performance. U.S. v. General Douglas MacArthur Senior Village, Inc., 508 F.2d 377, 381 (2d Cir. 1974). Both parties can technically perform but, as a result of unforeseeable events, performance by party X would no longer give party Y what induced him to make the bargain in the first place. Id. Thus frustrated, party Y may rescind the contract. Discharge of performance under this doctrine has been limited to instances where a virtually cataclysmic, wholly unforeseeable event renders the contract valueless to one party. Id. Thus, frustration of purpose applies where 1) a contingency—something unanticipated, unforeseeable or unexpected—has occurred; 2) the risk of the unexpected occurrence has not been allocated by agreement or otherwise; and 3) both parties can perform the contract but, as a result of the unforeseeable events, performance by one party would no longer give the other party what induced him to make the bargain in the first place. New York State Elec. & Gas Corp. v. Saranac Power Partners L.P., 117 F.Supp.2d 211, 253 (N.D.N.Y. 2000). Thus frustrated, the latter party may rescind the contract. Id. A typical instance where the frustration of purpose doctrine might be applied is where the house that is the subject of a purchase contract burns down.
As with the impossibility doctrine, whether Covid-19 was sufficiently foreseeable will depend on the circumstances surrounding the contract including when it was negotiated and executed. See In re Ampal–American Israel Corp., 2015 WL 5176395, at *12 (Bkrtcy. S.D.N.Y. 2015) (when considering frustration of purpose defenses, the Court must give effect to the intent of the parties as reflected in the language and the structure of their agreement).
The frustration of purpose doctrine is available only when the circumstance that has ceased to exist was the foundation of the entire contract. Robert J. McRell Associates, Inc. v. Insurance Co. of North America, 677 F.Supp. 721, 728 (S.D.N.Y. 1987). The doctrine does not apply simply because the transaction has become less profitable for the affected party or even that he will sustain a loss. Rockland Development Associates v. Richlou Auto Body, 173 A.D.2d 690, 691 (2d Dept. 1991).
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Whether Covid-19 will trigger any of the above defenses to a contract, or excuse performance by one party, requires a fact-specific analysis and interpretation of existing case law.
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