When is a Contract Impossible to Perform? Under New York Law, Rarely

• Posted on: Aug 13 2018

There are times when a party to a contract wants to be excused from the obligations set forth in their agreement. Under New York, the circumstances under which a court will excuse a party from performance are limited, namely, where there is an intervening event that was both unforeseeable and destroyed either the subject matter of the contract or the means by which the parties could perform thereunder. Since the circumstances in which a contract will be deemed impossible to perform are limited, defendants (those accused of breaching a contract) asserting the “doctrine of impossibility,” rarely succeed in defeating a motion to dismiss.

The Doctrine of Impossibility

“[T]he excuse of impossibility of performance is limited to the destruction of the means of performance by an act of God, vis major, or by law.” Kel Kim Corp. v. Central Markets, 70 N.Y.2d 900 (1987). Thus, if one party to the contract cannot perform due to an event that the parties could not have foreseen when negotiating their contract, the other party cannot recover for breach of contract. 407 E. 61st Garage v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 282 (1968).

In Kel Kim, the defendant (Kel Kim) defaulted on a lease for a roller-skating rink it operated due to its inability to maintain adequate insurance coverage, as required by the terms of the lease. Kel Kim sought a declaratory judgment that it should be excused from the insurance obligation because performance had been rendered impossible by the then liability insurance crisis sweeping the nation.

The motion court granted summary judgment against Kel Kim, and the Third Department affirmed. The Court of Appeals affirmed the Third Department’s ruling, holding that the impossibility doctrine did not excuse Kel Kim’s failure to perform. The Court explained that the doctrine is “applied narrowly, due in part to judicial recognition that the purpose of contract law is to allocate the risks that might affect performance and that performance should be excused only in extreme circumstances.” Thus, held the Court, the defense applies “only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible.” The Court found that Kel Kim could not avail itself of the doctrine because its “inability to procure and maintain requisite coverage could have been foreseen and guarded against when it specifically undertook that obligation in the lease.”

After Kel Kim, New York courts have considered several factors to determine whether the impossibility doctrine is a viable defense, including “the foreseeability of the event occurring, the fault of the nonperforming party in causing or not providing protection against the event occurring, the severity of harm, and other circumstances affecting the just allocation of the risk.” D & A Structural Contractors v. Unger, 25 Misc. 3d 1211(A) (Sup. Ct. Nassau Co. 2009). One factor not considered is the economic or financial hardship of the non-performing party. Thus, where the impossibility or impractability of performance is due solely to financial or economic hardship, even where such hardship results in the party’s insolvency or bankruptcy, the courts will not excuse performance of the contract. Sassower v. Blumenfeld, 24 Misc. 3d 843, 846-847 (Sup. Ct. Nassau County 2009) (performance of a contract is not excused where impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy); Maple Farms Inc. v. City School Dist., 76 Misc .2d 1080, 1083 (Sup. Ct. Chemung County 1974).

On July 30, 2018, Justice Sherwood of the Supreme Court, New York County, Commercial Division rejected an impossibility defense to a breach of contract claim based on a change in the market for taxi medallions (i.e., a change in economic conditions). Capital One Equip. v. Deus, 2018 N.Y. Slip Op. 31819(U) (here).

Capital One Equipment v. Deus

Background

In February 2013, defendants Augustin v. Deus and Adeline Deus (“Defendants”) secured a $422,000.00 loan from N.A.A. Funding Inc. (“NAA”). The loan was evidenced by a promissory note (“Note”), as well as a loan agreement and a security agreement. Upon closing the loan, NAA assigned a 100% participation interest in the Note to Plaintiff, Capital One Taxi Medallion Finance (“Plaintiff” or “COTMF”). As a result, COTMF acquired all the rights and remedies attendant to the loan. The loan was to mature in March 2016, at which time all outstanding amounts were due in full.

On the maturity date, Defendants defaulted on the Note. COTMF notified Defendants in July 2017, that all amounts outstanding were immediately due. As of September 2017, Defendants had made partial post-maturity payments of $130,314.62, leaving a claimed balance of $402,343.14 in principal and interest due and owing to COTMF.

Plaintiff moved for summary judgment in lieu of complaint pursuant to CPLR § 3213. (CPLR § 3213 provides that “when an action is based upon an instrument for the payment of money only or upon any judgment, the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint.”) In opposing the motion, Defendants claimed, among other things, impracticability or impossibility of performance due to the financial impact of ride sharing companies, such as Uber and Lyft, on the medallion and taxi industry and, in particular, the financial impact of those companies on Defendants’ ability to pay back the Note.

The Court’s Ruling

The Court granted the motion for summary judgment. In doing so, the Court agreed with the Plaintiff that “the impossibility defense … only excuses a party’s contractual performance where there was been destruction or obstruction by God, a superior force, or by law. It does not extend to situations where performance has become more difficult or expensive due to economic conditions.”

In granting the motion, the Court explained:

Defendants base the defense of impossibility upon the idea that, due to the economic change on the medallion and taxi industry of New York by ride sharing applications like Uber and Lyft, there is an impossible hurdle for the defendants to overcome, making the repayment of the loan impossible. Since the defendants rely upon an argument of economic impracticability of repaying the loan, the standard for impossibility is not met.

Takeaway

Once the parties to a contract have agreed upon the terms and conditions that govern their performance, they must perform their obligations or respond in damages for their failure to do so, even when unforeseen circumstances make performance impracticable or impossible. While defenses such as impossibility of performance have been recognized by the courts, they have, nevertheless, been applied narrowly, due in part to the recognition that the purpose of contract law is to allocate the risks that might affect performance and that performance should be excused only in extreme circumstances. Kel Kim Corp., 70 N.Y.2d at 902. Thus, impossibility will excuse a party’s performance only where “the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible.” Id.  “The impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.” Id. Capital One Equipment is an example of the judicial reluctance to interfere with the parties’ allocation of risks, especially where the reason proffered for such reallocation is based solely on economic hardship.

Tagged with: Breach of Contract, Business Litigation, Commercial Litigation, Impossibility of Performance