COVID-19’s Continuing Impact on Commercial Transactions and Businesses

As the world has been turned upside down by the onslaught of COVID-19, it has and will have significant impacts on contracts and agreements for many years to come. In this unprecedented time, it is important to look back on the essence of force majeure in existing contracts, and in the absence thereof, what the current state of the law has to say about such dire and unforeseen circumstances.

On March 7, 2020, Governor Andrew Cuomo issued Executive Order Number 202, declaring an emergency for the entire State of New York. In an effort to prevent the spread of the virus, Governor Cuomo imposed measures such as travel restrictions, ordered the closure of non-essential businesses, implemented a ban on public gatherings, imposed a moratorium on tenant evictions and prohibited banks to foreclose on properties, just to name a few.

Two months later, on May 7, 2020, this Executive Order was extended to remain in effect until June 6, 2020. It is unclear when the pandemic will subside but undoubtedly, COVID-19 has caused substantial damage to business operations, and impeded commercial and residential transactions. No doubt, that parties under contract prior to the pandemic, may look at the realities confronting them, and determine that they need an “out” to excuse performance or failure to perform. It is very foreseeable that, for example, an investor or business owner may claim that the contract is suspended or terminated for force majeure, or that performance is impossible, or that the purpose of the contract is so frustrated that the party should be excused from performance. We will explore some of these arguments and assess their merits, keeping in mind, however, until these issues ripen into legal actions before triers of fact and law, there may be a number of new interpretations of the law forthcoming.

A. Force Majeure
Force majeure, translated from French, means superior forces (i.e., acts of God). Contracts may include a force majeure clause, which operates to excuse one or both parties’ performance obligations when circumstances arise, which are beyond the parties’ control and make performance of the contract impracticable or impossible. See Macalloy Corporation v. Metallurg, Inc., 284 A.D.2d 227 (1st Dep’t. 2001). A party to a contract can invoke the force majeure defense if the contract contemplates and expressly provides for this clause. Force majeure clauses should expressly list the various events, which often include: acts of God (i.e., floods, fire, earthquakes, hurricanes, etc.), war, acts of terrorism, acts of governmental orders, strikes and labor disputes. Until current events, it is likely that such clauses did not include the words epidemic or pandemic. New York courts generally interpret force majeure clauses narrowly. The general rule is that performance will be excused if the contract specifically contemplates the particular event which prevents the performance. Therefore, if the clause specifically lists “pandemic” as an event excusing performance, the Court would more likely to read that as an agreed term by the parties as an acceptable event to excuse performance. Team Mktg. USA Corp. v. Power Pact, LLC, 41 A.D.3d 939, 942–43, 839 N.Y.S.2d 242 (3rd Dep’t. 2007) (Stating that when the event that prevents performance is not enumerated, but the clause contains an expansive catchall phrase in addition to specific events, then words constituting general language of excuse are not to be given the most expansive meaning possible, but are held to apply only those specifically mentioned.) See also Kel Kim Corp. v Central Mkts., 131 AD2d 947, 950 [1987], affd 70 NY2d 900 [1987] (only where force majeure clause in contract specifically includes event that actually prevents a party’s performance will that party be excused). Nevertheless, the party invoking the clause, has the burden to prove its applicability. See L’Oreal USA, Inc. v. PM Hotel Assocs., L.P., 11 Misc. 3d 1076(A), 816 N.Y.S.2d 696 (Civ. Ct. 2006) (Stating that it is not the function of the court to re-write the parties’ agreement).

B. Impossibility vs. Impracticability
The doctrine of impossibility excuses a party’s performance, where performance is made impossible based on a change in circumstances or the discovery of preexisting circumstances, the nonoccurrence of which was an underlying assumption of the contract, that makes performance of the contract impossible. Restatement (Second) of Contracts § 261. The doctrine of impossibility excuses a contracting party’s performance “only when destruction of the subject matter of the contract or means of performance makes performance objectively impossible”. See Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900; see also Kolodin v. Valenti, 115 A.D.3d 197, 979 N.Y.S.2d 587 (1st Dep’t 2014) (performance of the contracts at issue has been rendered objectively impossible, when an event caused by an act of God or by law prevents or prohibits such performance). Moreover, impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract. Id. Thus, if the contractual agreement was negotiated prior to the outbreak of the coronavirus, for example, a party may be able to seek relief under the doctrine of impossibility. For example, the Governor’s Executive Order which prevents businesses from operating may constitute an event excusable under the doctrine of impossibility. See Bush v. Protravel Intern, 192 Misc.2d 742, 746 N.Y.S.2d 790 (Civ. Ct. Richmond Co. 2002) (rejecting motion for summary judgment, stating that issue of fact existed as to whether government restrictions immediately following the September 11 terrorist attacks excused customer’s late travel cancellation); see also 407 E. 61st Garage v Savoy Fifth Ave. Corp., 23 NY2d 275, 281 [1968]) (Stating that “the excuse of impossibility is generally limited to the destruction of the means of performance by an act of God, vis major, or by law”). Contrary, if your business was deemed an “essential” business not under the restrictions of the Executive Order, but the business did not want to open merely because of personal or safety concerns, then the doctrine of impossibility may not apply.

On the other hand, the doctrine of impracticability excuses performance of a duty, where the said duty has become unfeasibly difficult, burdensome, or expensive for the party who was to perform. In Asphalt International, Inc. v. Enterprise Shipping Corporation, S.A., a charterer of a tanker brought suit for breach of contract against the owner, alleging that the owner had breached its duty to repair the vessel under the charter party agreement, and sought damages for lost business and profits expected in the course of full performance of the charter. See Asphalt Int’l, Inc. v. Enter. Shipping Corp., S.A., 667 F.2d 261 (2d Cir. 1981). The tankers were rammed amidships while being loaded, so the owner treated its vessel as a total loss instead of repairing the tankers because the cost of repairing the tankers were more expensive than the pre-collision fair market value of the vessels. Id. The Court of Appeals affirmed the lower court decision and held that the owner could treat its vessel as a total loss and be excused from further liability pursuant to the terms of the charter party agreement, where the cost of repair exceeded the vessel’s pre-collision fair market value. Id. The doctrine of impracticability focuses on the reasonableness of the expenditure at issue, not upon the ability of party to pay the commercially unreasonable expense. Id.

The major difference between the doctrine of impossibility and the doctrine of impracticability is that while impossibility excuses performance where the contractual obligation cannot physically or legally be performed, the doctrine of impracticability comes into play where performance is still physically possible, but would be extremely burdensome (i.e., financially burdensome, or lack commercial sense) for the party whose performance is due. See Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900; but see Asphalt Int’l, Inc. v. Enter. Shipping Corp., S.A., 667 F.2d 261.

C. Frustration of Purpose
The doctrine of frustration of purpose discharges a contracting party’s duties to perform where an unforeseen event has occurred, which, in the context of the entire transaction, destroys the underlying reasons for performing the contract, even though performance is possible. See Gander Mountain Co. v. Islip U-Slip LLC, 923 F. Supp. 2d 351 (N.D.N.Y. 2013), aff’d, 561 F. App’x 48 (2d Cir. 2014). This doctrine is invoked to excuse performance when a wholly unforeseeable event renders the contract valueless to one party; it is not enough that the transaction has become less profitable for the affected party or even that he will sustain a loss. Id. In order to invoke the doctrine of frustration of purpose, frustrated purpose must be the basic assumption on which the contract was made that, as both parties understood, without it, the transaction would have made little sense. Restatement (Second) of Contracts § 265. The doctrine of frustration of purpose is a narrow one which does not apply unless the frustration is substantial. See Crown IT Servs., Inc. v. Koval-Olsen, 11 A.D.3d 263, 782 N.Y.S.2d 708 (2004). In Crown IT Servs., Inc. v. Koval-Olsen, the Court reversed lower court’s decision, and granted summary judgment to the consulting firm seeking to enforce liquidated damages clause of parties’ non-compete agreement. Even though the consulting firm was no longer an approved vendor for client when consultant began providing services to client, firm’s recovery under restrictive covenant with consultant was not barred by doctrine of frustration of purpose, since terms of contract were not contingent upon firm’s status as approved vendor of its clients. Id. In other words, whether or not the consulting firm was an approved vendor of the client, is not the basic assumption on which the contract (i.e., the non-compete agreement) was made. Therefore, the court determined that the frustration of purpose defense did not apply.
As a result, if the court determines that the doctrine of frustration of purpose applies, the court will not order enforcement of the remaining obligations of the parties, but rather leave each party as they are found.

Conclusion
Each case has its own specific fact pattern, and as such, the court will apply the law on a case by case basis. Given the COVID-19 pandemic, it likely will become common practice to incorporate the language necessary to safeguard interests in a contract or an agreement that is attributable to a pandemic-type event.

The Real Estate Transaction team at Forchelli Deegan Terrana LLP is here to help answer your questions and assist you with your needs. Please feel free to contact us should you have any questions or concerns.

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