NY Contract Litigation Indicates Limits Of COVID-19 Defenses

By Seth Kruglak
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Law360 (November 25, 2020, 2:03 PM EST) --
Seth Kruglak
Seth Kruglak
We have long expected a wave of COVID-19 litigation exploring the limits of force majeure, impossibility and frustration of purpose doctrines in New York. While we have yet to see major decisions on the merits in the most factually on-point cases, a few guideposts are clear.

First, New York courts will not allow parties to use COVID-19 as an excuse for prepandemic breaches and will question payment defaults under settlement agreements struck prior to the pandemic.

Second, courts might not be receptive to efforts to use COVID-19 as a reason to vacate preliminary injunctions entered prior to the pandemic.

Third, COVID-19 excuses might be limited when raised in connection with a contract containing a time-is-of-the -essence performance clause.

And finally, cases winding their way through the courts bear close watching.

COVID-19 is not an excuse for prior breaches.

Raising a COVID-19 excuse for a contract breach that occurred prior to the pandemic will draw the ire of judges. For example, in Firmenich Inc. v. TPR Holdings LLC,[1] a Commercial Division justice in New York County made clear that she did not appreciate a defendant's raising the pandemic as an excuse for not paying a promissory note upon which it had stopped paying in April 2019:

With respect to defendant's claims about impossibility and frustration of purpose, the Court wholly rejects those arguments. This Court can look at a calendar; the alleged nonpayments started in April 2019. The pandemic did not start causing business disruption in the United States until 2020. Although there will likely be many cases exploring how the pandemic might affect disputes over contracts and promissory notes, this is not such a case. In fact, it is patently absurd that defendant would disingenuously cite to a pandemic that has caused so much harm around the world as a defense to a default that occurred last year. The pandemic is not a catch-all defense to disputes that began last year.

Another recurring fact pattern involves defendants using COVID-19 as an excuse for defaulting on payments due under settlement agreements struck prior to the pandemic.

Courts have rejected such efforts, starting with the U.S. District Court for the Southern District of New York's decision from May in Lantino v. Clay LLC.[2] In that case plaintiffs moved to enter a consent judgment against certain New York-area gyms and individuals who defaulted on payments under an agreement to settle Fair Labor Standards Act claims.

The settlement agreement provided for entry of a consent judgment for $1 million, less any payments previously made, in the event defendants missed a payment. In response, defendants claimed that "their performance should be excused based upon the doctrine of impossibility because of their inability to pay, ostensibly as a result of the COVID-19 pandemic and Governor Cuomo's PAUSE Executive Order."[3]

The court recited longstanding New York law that economic hardship does not excuse performance on impossibility grounds and stated:

At best, Defendants have established financial difficulties arising out of the COVID-19 pandemic and the PAUSE Executive Order that adversely affected their ability to make the payments called for under the Settlement Agreement. As such, Defendants' performance under the Settlement Agreement is not excused.[4]

Other federal and state New York decisions have cited and followed Lantino.[5]

COVID-19 is not a basis on which to vacate preliminary injunction.

In Vector Media LLC v. Go New York Tours Inc.,[6] the Appellate Division's First Department recently affirmed a preliminary injunction entered in 2019 requiring defendant tour bus operator to continue to provide plaintiff advertising agency the exclusive right to sell and place advertising on the tour buses pursuant to a contract.

In the interim, the Commercial Division denied the tour bus operator's motion to vacate the injunction on account of the pandemic: "COVID-19 and the resulting pandemic do not present impossibility or frustration of purpose to performance of the [contract] ... or the Preliminary Injunction" because the tour bus operator "concedes that it can lawfully operate its business notwithstanding with certain restrictions, and as such, cannot claim that performance is objectively impossible."[7]

Nor could a reduction in revenue from COVID-19 constitute frustration of purpose because, among other items, the contract at issue specifically contemplated the situation where the number of buses it operated fell below certain thresholds.[8]

COVID-19 does not extend time-is-of-the-essence obligations.

In the real estate space, U.S. Bankruptcy Judge Michael Wiles for the U.S. Bankruptcy Court for the Southern District of New York held that a purchaser of a hotel in Puerto Rico could not postpone the closing based on frustration of purpose, failure of consideration, impossibility or impracticability arguments when the parties' purchase and sale agreement contained a time-is-of-the-essence clause for the parties' obligations under it.

In In re: Condado Plaza Acquisition LLC,[9] the debtors entered into the purchase and sale agreement in November 2019 to purchase the Condado Plaza Hilton Hotel in San Juan, Puerto Rico, for the price of $31 million and placed an initial deposit of $3.1 million into escrow. The contract stated time is of the essence for the parties' obligations under the purchase and sale agreement and scheduled the transaction to close in December 2019.

The parties agreed to several extensions of the closing date, including one such extension made on March 17, where the purchasers agreed to waive all conditions precedent to the closing. Notably this date came after the World Health Organization declared a pandemic and after the Governor of Puerto Rico had declared a state of emergency in Puerto Rico and issued an order requiring the closure of all businesses until March 30, subject to certain inapplicable exceptions.

Litigation ensued when the purchaser refused to close in May 2020 and instead sought to delay the closing in order to further evaluate the hotel's prospects.

The court dispensed with several contract-based arguments made by the purchaser, but, most significantly for our purposes, Judge Wiles held that the purchaser's efforts to postpone the closing based on the doctrines of frustration of purpose, failure of consideration, impossibility and impracticability fell flat. He noted that the purchasers did not supply any authority or support that these doctrines could extend an express time-is-of-the essence closing provision:

The Closing Date deadline was itself a material provision of the contract. Either the contract could be performed on the Closing Date (in which case [Purchaser] was obligated to close), or it could not be performed on that date (in which case the parties were excused from their respective obligations). In either case the 'time of the essence' Closing Date was not extended.[10]

The court also stated it was skeptical of applying each justification were it required to address the issue:

  • Frustration of purpose: If the purpose of the PSA was so completely frustrated by an unforeseeable event, then the purchaser would have a defense to enforcement of the PSA and an argument for the return of its escrowed deposit, but the closing date deadline still applied.

  • Failure of consideration: The court noted that this "is a doctrine that permits rescission of a contract if a party receives little or nothing of value," that it "does not apply if the alleged failure of consideration is a risk that the party took under the terms of the contract," and that either the consideration was sufficient or not. It would not extend the closing date.

  • Impossibility and impracticability: The court cited well-established case law that the doctrine of impossibility "does not excuse performance of a contract merely because the performance would be burdensome or unprofitable" and questioned whether impracticability applies under New York law outside the context of the Uniform Commercial Code.[11]

Pending cases bear close watching.

We await future decisions on the merits of the typical COVID-19 defenses. In one case pending in the U.S. District Court for the Eastern District of New York, a Brazilian bank issued cobranded credit cards with a U.S.-based airline and agreed to purchase a minimum quantity of frequent flyer miles from that airline to provide to cardholders to earn with purchases.[12]

The bank filed a declaratory judgment action against the airline on grounds that the airline's decision to stop operating flights between the U.S. and Brazil for more than 90 days constituted a force majeure under the contract permitting the bank to terminate the agreement. In the alternative, the bank sought a declaratory judgment that it is excused from further performance of its obligations under the common law doctrine of frustration of purpose. The motion to dismiss filed by the airline is fully briefed and awaits a decision.

Conclusion

While we have the preliminary views on how New York courts might treat COVID-19 defenses, we have yet to see a decision on the merits in a case where COVID-19 excuses take center stage. Such disputes winding through the courts bear watching and we will take note of any key developments.



Seth M. Kruglak is a partner 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] No. 652751/2020, 2020 N.Y. Slip Op. 33087(U), at *3-*4 (Sup. Ct. N.Y. Cnty. Sept. 18, 2020).

[2] No. 1:18-cv-12247 (SDA), 2020 WL 2239957 (S.D.N.Y. May 8, 2020).

[3] Id. at *3.

[4] Id.

[5] See Maesa LLC v. TPR Holdings LLC, No. 652685/2020, 2020 WL 5499231 (N.Y. Sup. Ct. N.Y. Cnty. Sept. 9, 2020) (stating in suit to enforce settlement agreement that "defendant submits no evidence or explanation of how performance was impossible by the June 15, 2020 cure date . . . , rather than being difficult due to the pandemic"); Butler v. Suria , No. 17 Civ. 3077 (KPF), 2020 WL 5105160, at *2 (S.D.N.Y. Aug. 31, 2020) (holding defendant's inability to pay sums due under settlement agreement not a defense to breach of contract because "[t]o the extent Defendant argues that financial difficulty caused by the COVID-19 pandemic excuses performance, Defendant has not met the high burden to establish that this excuse applies").

[6] 130 N.Y.S.3d 304 (1st Dep't 2020).

[7] No. 653808/2019, 2020 WL 5992328 (N.Y. Sup. Ct. N.Y. Cnty. Oct. 7, 2020).

[8] Id.

[9] No. 20-12094 (MEW), 2020 WL 6038813 (Bankr. S.D.N.Y. Oct. 9, 2020).

[10] Id. at *14.

[11] Id. at *13-*14.

[12] Banco Santander (Brasil), S.A. v. American Airlines, Inc. , No. 20-CV-3098 (RPK) (RER), 2020 WL 4926271 (E.D.N.Y. Aug. 21, 2020) (addressing sealing matters).


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