2 Key NY Law Considerations For COVID-19 Contract Disputes

By Seth Kruglak and Victoria Corder
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Law360 (May 13, 2020, 5:28 PM EDT) --
Seth Kruglak
Victoria Corder
New York law narrowly construes force majeure clauses and the doctrines of impossibility and frustration of purpose. Court decisions in the wake of the 2008 global financial crisis reinforce the long-standing view in New York that economic or financial difficulty provides no excuse from performing a contract.

The current crisis is different. It was not triggered by excessive credit risk in the financial markets, but rather by COVID-19 or the shutdowns, travel bans, and stay-at-home orders issued by governments in response to the public health emergency. The novel coronavirus therefore presents novel factual issues that parties will argue excuse contractual performance.

When these matters are litigated, parties will join issue on two perhaps overlooked issues: First, was COVID-19 and the government response foreseeable? Second, is performance completely excused, or merely delayed until governments lift COVID-19 restrictions? As we discuss below, one size does not fit all and the answers turn on a case-by-case basis.

Was COVID-19 unforeseeable?

New York law requires an intervening event to be unforeseeable for purposes of force majeure, impossibility and frustration of purpose.[1] Whether COVID-19 was unforeseeable might not be as obvious as it seems depending on the facts and circumstances presented.

Was the pandemic unforeseeable to market participants that had dealt with SARS or other deadly virus outbreaks? Was it unforeseeable for parties executing contracts in January after word of the novel coronavirus in China reached the United States? February? Was it foreseeable that governors would issue stay-at-home orders in response to COVID-19? When? These are just some of the questions courts will face in the coming months.

To answer these questions, New York courts might consult wartime cases. One example arises from World War II. In 119 Fifth Avenue Inc. v. Taiyo Trading Co., a landlord entered into a lease in September 1940 to lease premises to a tenant expressly "'for the sale, assembly, storage and shipping of Japanese goods, Chinese goods, Oriental goods, and/or other kindred merchandise, and for no other purpose'" for a period of three years beginning in February 1941.[2] 

In December 1941, the government padlocked the premises and took possession of its contents under the Trading with the Enemy Act because the tenant was a foreign national.[3] The tenant vacated the premises and failed to pay accrued rent.[4] The landlord sued for the unpaid rent, and the defendant raised defenses of frustration and impossibility.

The court held questions of fact remained as to both frustration and foreseeability, despite the lease having been executed over a year before the Pearl Harbor attack:

[A]n issue of fact is presented as to whether the purpose of the lease was completely frustrated and performance rendered impossible by the exercise of governmental authority. For "even more clearly with respect to leases than in regard to ordinary contracts, the applicability of the doctrine of frustration depends on the total or nearly total destruction of the purpose for which, in the contemplation of both parties, the transaction was entered into." Another issue of fact is presented as to whether the supervening event or circumstance was within the contemplation of the parties at the time of the execution of the lease and might have been anticipated and guarded against; this issue being raised by the circumstance that, at the time of the making of the lease, this country was in a state of limited national emergency. Indeed, Executive Order No. 8389, 12 U.S.C.A. § 95a note, upon which defendant relies, and then been in effect almost six months.[5]

The First Department affirmed the decision, but added that if in fact "the premises were vacated by government decision and direction, performance of the contract was prevented by law and defendant would be relieved of further liability under the lease."[6]

New York courts will likely encounter similar foreseeability issues on motions to dismiss and summary judgment in the months ahead.

Is performance required when the impossibility ends?

If not expressly addressed in the contract (e.g., through a force majeure clause), parties might argue that performance is (or is not) required once COVID-19 government restrictions are eased and lifted. Here courts might consult cases arising from the aftermath of 9/11, wars and other disasters where extraordinary events hindered contractual performance for a specific duration, as opposed to impossibility created by permanent government actions.

For example, in the aftermath of 9/11, Judge Eric Vitaliano (then sitting on New York City's Civil Court and currently a federal judge on the U.S. District Court for the Eastern District of New York) addressed the concept of temporary impossibility in Bush v. ProTravel International Inc.[7]

In response to the 9/11 attacks, plaintiff Alexandra Bush sought to cancel a safari she had booked for her honeymoon in November 2011.[8] The defendant travel agency, ProTravel, and the tour provider argued that she could not avoid a cancellation penalty because she failed to cancel more than 60 days prior to her departure.[9] Bush argued that she was physically unable to communicate her cancellation to the travel agency until Sept. 27, 2001, because "of the interruption of telephone service between Staten Island, where she had fled to safety, and Manhattan, where ProTravel maintained an office in midtown" and difficulties with accessing Manhattan.[10]

Judge Vitaliano denied summary judgment for defendants, pointing out Bush's testimony that the disaster was unforeseen, unforeseeable and beyond her control, and destroyed her ability and means to communicate her cancellation.[11] The court also stated that then-Mayor Rudy Giuliani's state of emergency declaration, then-Gov. George Pataki's state disaster emergency declaration, and then-Gov. Pataki's executive order extending the statute of limitations for all civil actions supported Bush.[12]

In addition, the court analogized the events of 9/11 to the Civil War and the War of 1812, and remarked that "it is entirely appropriate for this court to consider and follow wartime precedents which developed the law of temporary impossibility. Stated succinctly, where a supervening act creates a temporary impossibility, particularly of brief duration, the impossibility may be viewed as merely excusing performance until it subsequently becomes possible to perform rather than excusing performance altogether."[13]

The court concluded that if Bush could establish objective impossibility of performance, then at a minimum she would be entitled to a "reasonable suspension of her contractual obligation to timely cancel, if not outright excuse of her untimely cancellation."[14]

The Bush court relied on Erdreich v. Zimmerman, in which the First Department held that a purchaser of German war bonds from a New York securities dealer in December 1916 — prior to the United States' entry into World War I — could not rescind his purchase and receive a refund when the dealer failed to deliver the bonds until after the war ended, at which time the bonds were worthless.[15]

The First Department reasoned that time was not of the essence in the contract and "[a]t most, the delivery of said bonds was suspended during hostilities. Until the declaration of peace, delivery of the bonds would be impossible, but when peace shall come, as it eventually must, then the valid transaction as to the sale of the bonds, which has been suspended during hostilities, may be completed by the delivery of said bonds. In other words, our entry into the war did not cancel a valid contract between plaintiff and defendants, but merely suspended the same until peace shall be declared."[16]

New York federal courts have also recognized temporary impossibility in limited circumstances.

For example, in Scanlan v. Devon Systems Inc., the U.S. District Court for the Southern District of New York held with respect to a contract that was legal, then illegal based upon a contracting party's reincorporation into a foreign jurisdiction, but legal once that party reincorporated in the United States again, that "the impossibility suspends performance, but does not excuse it when the impossibility is removed."[17]

And in Bank of Boston International of Miami v. Arguello Tefel, the U.S. District Court for the Eastern District of New York held that any impossibility of the borrowers to pay the lender caused by currency restrictions in Nicaragua "was only temporary" and not a defense to payment because defendants lived in United States after payment default.[18]

A recent New York Supreme Court decision might provide insight into how trial courts will determine whether the length of the impact from an unexpected event completely excuses, or simply delays, performance.

In Leisure Time Travel Inc. v. Villa Roma Resort and Conference Center Inc., a travel company entered into two contracts with a Catskills resort to host Passover celebrations from 2002 to 2011.[19] A fire broke out the day before Passover in 2006, destroying the main building of the hotel and closing the resort from 2006 to 2008.[20] On summary judgment, the court required the resort to refund the travel company's deposit for the 2006 celebration, reasoning that "[w]hile impossibility can excuse performance of a contract, it is not available to unjustly enrich a party at the expense of another."[21]

The court also rejected the resort's claim for damages for the travel company's failure to pay for use of the hotel in 2007 and 2008 when the resort was closed and under construction.[22] Notably the court rejected the travel company's claim for damages for the resort's refusal to host the Passover celebrations for 2009-2011 — after the hotel was rebuilt — on grounds that "[u]nder the facts of this case, the [parties'] contract was rescinded at the time of the fire."[23]

The court reasoned that "[a]lthough the condition of impossibility ultimately proved to be temporary, it was of a long duration. Moreover, at the time of the fire, it was unclear whether the hotel would ever be rebuilt. Certainly, it would have been unfair to require the plaintiff, whose business model depends on repeat customers, to return after using an alternate location in 2007 and 2008. Thus, there was no mutuality of obligation and the contract was rendered unenforceable."[24]

Gov. Andrew Cuomo has issued state of emergency and stay-at-home orders and issued orders tolling certain statutes of limitation. The federal government has issued a nationwide emergency declaration due to COVID-19 and a major disaster declaration for New York. As government restrictions are lifted as the COVID-19 public health emergency hopefully subsides, parties will litigate whether performance is excused or still required. We will await the answers from courts in the months and years to come.

Seth M. Kruglak is a partner and Victoria V. Corder is a senior associate at Norton Rose Fulbright.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See, e.g., Kel Kim Corp. v. Cent. Markets, Inc. , 70 N.Y.2d 900, 902-03 (1987); Goldstein v. Orensanz Events LLC , 146 A.D.3d 492, 492-93 (1st Dep't 2017); Warner v. Kaplan , 71 A.D.3d 1, 6 (1st Dep't 2009).

[2] 119 Fifth Avenue, Inc. v. Taiyo Trading Co ., 190 Misc. 123, 124 (Sup. Ct. N.Y. Cnty. 1947).

[3] Id. 

[4] Id. 

[5] Id. at 126-27 (citations omitted).  "On June 14, 1941, Executive Order No. 8389, 12 U.S.C.A. s 95a note, became effective as to Japan, and it blocked all transfers of evidences of debt or interests in property of Japanese citizens." Orvis v. Brownell , 345 U.S. 183, 185 (1953).

[6] 119 Fifth Avenue, Inc. v. Taiyo Trading Co. , 275 A.D. 695, 695 (1st Dep't 1949).

[7] 192 Misc. 2d 743 (Civ. Ct. Richmond Cnty. 2002).

[8] Id. at 744. 

[9] Id. at 744-46. 

[10] Id. at 744.

[11] Id. at 748. 

[12] Id. at 748-50 & nn. 1-3. 

[13] Id. at 752. 

[14] Id. at 753.

[15] 190 A.D. 443, 452 (1st Dep't 1920). 

[16] Id. at 449, 451. 

[17] No. 89 Civ 1634 LMM, 2000 WL 218389, at *2-*3 (S.D.N.Y. Feb. 24, 2000). 

[18] 644 F. Supp. 1423, 1425-26 (E.D.N.Y. 1986).

[19] 55 Misc. 3d 780, 781-82 (Sup. Ct. Queens Cnty. 2017). 

[20] Id. at 781-83. 

[21] Id. 

[22] Id. at 782.

[23] Id. at 783. 

[24] Id.

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