COVID-19 and The Doctrines of Frustration and Impossibility of Contract Performance

• Posted on: Apr 28 2021

Under New York law, a party’s performance may be excused, even if the contract contains no express provision for the event that made performance impossible. See, e.g., City of New York v. Local 333, Mar. Div., Intl. Longshoremen’s Assn., 79 A.D.2d 410 (1st Dept. 1981). To determine whether performance may be excused, the court takes a wholistic approach, considering the facts and circumstances surrounding the non-performance and the roles, if any, the parties played in said non-performance. In Local 333, Mar. Div., Intl. Longshoremen’s Assn., the First Department explained the analysis as follows: “[r]ather than mechanically apply any fixed rule or law, where the parties themselves have not allocated responsibility, justice is better served by appraising all of the circumstances, the part the various parties played, and thereon determining liability.” 79 A.D.2d 410, 412-13.

Additionally, performance may be excused where it is impossible to do so. “Impossibility excuses a party’s performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible.” Warner v. Kaplan, 71 A.D.3d 1 (1st Dept. 2009). The “impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.”

The doctrines of frustration and impossibility of performance were recently examined by the court in 1877 Webster Ave. Inc. v. Tremont Ctr., LLC, 2021 N.Y. Slip Op. 21113 (Sup. Ct., Bronx County Mar. 29, 2021).

1877 Webster Avenue involved a written commercial lease, with a 10-year term, which the parties executed on or about November 15, 2019. In the lease, the parties agreed that the premises would be “used and occupied solely as a first class NIGHT CLUB and for no other purpose.”

Plaintiff commenced the action seeking a declaration that the purpose of the lease had been frustrated by the COVID-19 pandemic and that it was released from its obligations because the lease was voided and/or terminated as of March 17, 2020. Plaintiff also sought rescission of the lease based upon impossibility of performance; failure of consideration; constructive eviction; and a declaration that the personal guaranty given by Michael Franklin on behalf of Plaintiff was void.

Defendant moved to dismiss under CPLR §§ 3211(a)(1) and (a)(7). Defendant argued that Plaintiff’s frustration of purpose and impossibility of performance claims should be dismissed because there was no force majeure provision in the lease. [Ed. Note: A force majeure clause excuses non-performance only where the reasonable expectations of the parties have been frustrated due to circumstances beyond the control of the parties. See Macalloy Corp. v. Metallurg, Inc., 284 A.D.2d 227 (1st Dept. 2001).] Defendant maintained that an economic downturn caused by a global pandemic could have been foreseen or guarded against in their lease. Therefore, Defendant argued, the parties should be bound to the allocation of risks they agreed to in the lease.

Defendant also claimed that the global pandemic was foreseeable and, therefore, Plaintiff’s claims of frustration and impossibility should fail. Defendant argued that the parties could have allocated the risk of a global pandemic in their lease.

Defendant furthered argued that the lease only entitled Plaintiff to a rent abatement even if it was determined that Plaintiff’s performance was excused by the Covid pandemic and the Governor’s executive orders. [Ed. Note: Governor Andrew Cuomo first announced a State moratorium on residential and commercial evictions on March 20, 2020 for a period of 90 days to ensure no tenant was evicted during the height of the public health emergency. The commercial eviction and foreclosure moratorium was extended multiple times by executive orders.] Defendant maintained that Plaintiff was simply trying to get out of its obligations under the lease since Plaintiff temporarily closed its business. Defendant noted that, by Plaintiff’s admission, the business was ready to reopen. Finally, Defendant claimed that the lease specifically allocated the risks of closure to each party and Plaintiff acknowledged that the closing of the business was not due to any failure of the landlord.

In response, Plaintiff argued that the global pandemic and the Governor’s executive orders were unforeseeable and that, in any event, there were material issues of fact as to foreseeability of the Covid-19 pandemic. Plaintiff also argued that its claims for frustration and impossibility were not waived because their lease did not contain a force majeure clause.

The Court denied the CPLR § 3211(a)(7) motion.

The Court held that Plaintiff adequately pleaded frustration and impossibility of performance due to the Covid-19 pandemic and the Governor’s executive orders. The Court found that Plaintiff sufficiently alleged that the Covid-19 pandemic and the Governor’s executive orders prevented it from exclusively operating the subject premises as a night club as required by the lease. As such, the existence of the Covid pandemic and the executive orders “completely frustrated the purpose of the parties’ lease as both parties understood, and that without the ability to operate the nightclub, the lease and the guarantee make ‘little sense’”. Slip Op. at *4 (quoting Warner, 71 A.D.3d 1).

The Court also held that there were issues of fact surrounding the foreseeability of the impact of the Covid pandemic on the business. Slip Op. at *3. The Court found that the parties’ conflicting positions on foreseeability warranted denial of the motion.

The Court further held that Plaintiff sufficiently alleged impossibility of performance. As noted, Plaintiff claimed that due to the Covid-19 pandemic and the Governor’s executive orders, it was impossible perform under the lease. Since a night club was not an essential business under the Governor’s executive orders, Plaintiff claimed that it could not conduct its business as contemplated by the lease.

As with the frustration defense, the Court held that there were genuine issues of material fact concerning the impact of the Covid-19 pandemic and the Governor’s executive orders on Plaintiff’s performance under the lease: “The parties’ conflicting arguments regarding their abilities to anticipate or guard against the Covid pandemic that resulted in the Governor’s executive orders shutting down Plaintiff’s business also create a genuine issue of fact.” Id. Such issues of fact, concluded the Court, warranted the denial of the motion.

Takeaway

The global pandemic has impacted businesses across the country. Many states imposed emergency measures to address the health crisis – measures that had the effect of reducing business operations or shutting down the business. New York was no different.

Emergency measures and their impact on the legal rights of parties, as in 1877 Webster Avenue, will be litigated in the courts for years to come.