COVID-19 and the Doctrines of Frustration of Purpose and Impossibility

• Posted on: Mar 9 2022

By: Jeffrey M. Haber

In April 2021, this Blog examined the doctrines of frustration of purpose and impossibility of performance in the context of Covid-19 (here). In particular, we examined 1877 Webster Ave. Inc. v. Tremont Ctr., LLC, 2021 N.Y. Slip Op. 21113 (Sup. Ct., Bronx County Mar. 29, 2021), a case involving a commercial lease for space that was to be used as a night club and “for no other purpose”. The plaintiff commenced the action seeking a declaration that the purpose of the lease had been frustrated by the COVID-19 pandemic and sought, among other things, rescission of the lease based upon impossibility of performance.

The Supreme Court denied the motion to dismiss, holding that the plaintiff adequately pleaded frustration and impossibility of performance due to the 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.] The court found that the plaintiff sufficiently alleged that the Covid-19 pandemic and the Governor’s executive orders prevented it from exclusively operating the space 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 ma[d]e ‘little sense’”. 

The Supreme Court further held that the plaintiff sufficiently alleged impossibility of performance. The plaintiff claimed that due to the pandemic and the Governor’s executive orders, it was impossible to perform under the lease. Since a nightclub was not an essential business under the Governor’s executive orders, the plaintiff claimed that it could not conduct its business as contemplated by the lease. The Court held that there were genuine issues of material fact concerning the foregoing: “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.” 

Today, we examine Valentino U.S.A., Inc. v. 693 Fifth Owner LLC, 2022 N.Y. Slip Op. 01431 (1st Dept. Mar. 8, 2022) (here), a case that also involved a commercial lease and issues of performance due to the pandemic. 

Valentino involved a 15-year lease that the parties executed in May 2013. The lease provided that the space would be used by the plaintiff to operate a luxury boutique for customers to, among other things, view and sample its merchandise. When the pandemic started, the plaintiff’s operations ceased as New York was shut down to address the health crises. Once the Covid-related restrictions imposed by the Governor were lifted, the plaintiff claimed that it was unable to generate the same type of in-boutique retail sales, or associated services, that it did before the onset of the pandemic. As a consequence, the plaintiff notified the defendant that it would be vacating and surrendering the premises by the end of the year. Defendant rejected the plaintiff’s surrender.

Plaintiff commenced the action for declaratory and injunctive relief, seeking, inter alia, a declaration that the pandemic, together with resulting governmental orders and mandatory closures, had frustrated the purpose of the lease and/or made it impossible to perform thereunder. Defendant moved to dismiss. The Supreme Court granted the motion.

On appeal, the Appellate Division, First Department affirmed.

“As an initial matter,” the Court held that the “doctrine of frustration of purpose [was] inapplicable” to the case at hand.¹ Under the doctrine, the purpose of the contract must be so completely frustrated – that is, “the basis of the contract …, as both parties understood, without it, the transaction would have made little sense.”² In other words, the purpose of the contract must be completely thwarted.³ The Court concluded that the frustration of purpose doctrine was “not implicated by temporary governmental restrictions on in-person operations, [because] the parties’ respective duties were to pay rent in exchange for occupying the leased premises.”⁴ The Court explained that plaintiff was, in fact, “open for curbside retail services as of June 4, 2020 and services by appointment as of June 22, 2020,” thereby undermining its argument that the purpose of the lease had been frustrated.⁵

The Court also held that the doctrine of impossibility was inapplicable to the case at hand.⁶ 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”.⁷ The “impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.”⁸

The Court held that while the pandemic was, and continued to be, “‘disruptive for many businesses,’” it “did not render plaintiff’s performance impossible, even if its ability to provide a luxury experience was rendered more difficult because the leased premises were not destroyed.”⁹ 

Takeaway

As we noted in our April 2021 article, businesses will be impacted by the pandemic for years to come. From a legal perspective, there are many issues to consider. Among them is the performance of a contract, such as a lease. In Valentino, the courts ruled that the pandemic did not frustrate the purpose of the parties’ lease agreement, nor did it make performance thereunder impossible. To be sure, the pandemic negatively affected Valentino’s business, but to the courts, it did not completely thwart the very reason for the lease.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

Footnotes

1. Slip Op. at *1.
2. Crown IT Servs., Inc. v. Koval-Olsen, 11 A.D.3d 263, 265 (1st Dept. 2004). See also Restatement (Second) of Contracts § 265 (1981).
3. Slip Op. at *1 (citing Crown, 11 A.D.3d at 265).
4. Id.
5. Id. (citing Center for Specialty Care, Inc. v. CSC Acquisition I, LLC, 185 AD3d 34, 42 (1st Dept. 2020)).
6. Id.
7. Kel Kim Corp. v. Central Mkts., 70 N.Y.2d 900, 902 (1987). See also Warner v. Kaplan, 71 A.D.3d 1 (1st Dept. 2009).
8. Id.
9. Id. (quoting 558 Seventh Ave. Corp. v. Times Sq. Photo Inc., 194 A.D.3d 561, 562 (1st Dept.), appeal dismissed, 37 N.Y.3d 1040 (2021)).