Impossibility of Performance in the Time of COVID-19
Print Article- Posted on: Mar 26 2021
When parties enter into contracts, they generally do so with the expectation of receiving the benefits of their respective bargains. Hopefully, these expectations are realized when all parties perform. A party’s failure to perform under a contract frequently results in a claim for breach of contract. “Generally, once a party to a contract has made a promise, that party must perform or respond in damages for its failure, even where unforeseen circumstances make performance burdensome; until the late nineteenth century even impossibility of performance ordinarily did not provide a defense.” Kel Kim Corp. v. Central Markets, 70 N.Y.2d 900, 902 (1987) (citation omitted). This BLOG has analyzed numerous issues related to contract breaches – such as remedies for contractual breaches and defenses to breach of contract actions.
One defense to a breach of contract is “impossibility of performance,” which defense has been recognized for quite some time, and “ha[s] been 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.” Kel Kim, 70 N.Y.2d at 902.) Indeed, the defense of “impossibility of performance” is “limited to destruction of the means of performance by an act of God, Vis major, or by law.” 407 East 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 281 (1968) (citations omitted). Conversely, the defense is not available “where impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy….” 407 East, 23 N.Y.2d at 281 (citations omitted). Indeed, the Court in Urban Archaeology Ltd. v. 207 East 57th Street LLC, 34 Misc. 3d 1222(A) (2009), affirmed, 68 A.D.3d 562 (2009), surveyed cases addressing a breaching parties’ misplaced reliance on economic considerations to support an impossibility defense, and stated:
Thus, parties to a contract have not been permitted to avoid contractual obligations on the ground of impossibility where a commodity swap agreement was rendered extremely disadvantageous due to an increase in the price of cobalt (General Elec. Co. v. Metals Resources Group Ltd., 293 A.D.2d 417, 741 N.Y.S.2d 218 [1st Dept 2002] ); financial condition of a contracting party changed due to the fraud of Bernie Madoff (Sassower v. Blumenfeld, 24 Misc.3d 843, 878 N.Y.S.2d 602, 2009 N.Y. Slip Op. 29198 [Sup.Ct.2009] ); contracting party unable to secure financing in a form required (Stasyszyn v. Sutton East Assocs., [161 A.D.2d 275 (1st Dep’t 1990]); party unable to secure the level of insurance required due to a liability insurance (Kel Kim Corp. v. Central Markets, Inc., supra ), and a party was unable to generate sufficient cash flow due to the catastrophic economic collapse of the Asian market (Bank of New York v. Tri Polyta Finance B.V., 2003 WL 1960587 [S .D.NY 2003]).
Urban Archaeology at *4 (hyperlinks added). In Urban Archaeology, the court rejected plaintiff tenant’s attempt to avoid its obligations under a commercial lease because “the economic downturn [rendered it] unable to perform according to the terms of the Lease….” Urban Archaeology at *1.
On March 15, 2021, the Supreme Court of the State of New York, Kings County, decided 267 Development, LLC v. Brooklyn Babies and Toddlers, LLC, a lawsuit involving the alleged breach of a commercial lease in which the tenant raised, inter alia, the defense of the “doctrine of impossibility” in light of COVID-19 restrictions. The plaintiff in 267 Development was a commercial landlord that rented space to defendant tenant. The defendant’s lease obligations to landlord were guaranteed by defendant O’Neil. Tenant was forced to close its store due to “Executive Orders § 202.3, § 202.6 and § 202.7 closing certain businesses throughout New York State in response to the Covid-19 pandemic.” (Hyperlinks added.) The Court further noted that “Governor Cuomo initiated a moratorium on residential and commercial evictions and foreclosures in 2020 that has been extended through May 21, 2021.”
Landlord commenced action against tenant and guarantor seeking almost $100,000.00 in rent arrears and attorney’s fees. Landlord moved for summary judgment and tenant opposed the motion “rely[ing] in part upon New York City Administrative Code § 22-1005 (“§ 22-1005”), also referred to as Local Law 55[, p]ursuant to [which], commercial Landlords cannot seek monies for lease arrears from a non-tenant who personally guarantees a lease agreement on behalf of a business that meets the criteria as set forth in the provision.” The Court noted that § 22-1005 “refers to businesses that were forced to close as a result of the Executive Orders signed by Governor Cuomo”, but only refers to “the guarantors of commercial leases and not the tenant itself.”
Among other arguments, tenant asserted that landlord’s motion should be denied for “impossibility of performance,” which is a common law doctrine recognized under New York law “to excuse performance when there have been extraordinary intervening events.” The Court denied landlord’s motion and held that “the shutdown of [tenant]’s business has precluded it from performing its contractual obligations. The government shutdown was unforeseeable and could not have been built into the contract. Under the circumstances presented, this Court finds that performance under the subject lease was made impossible.” In so doing, the Court relied on, inter alia, Kel Kim, supra. The Court also drew an analogy to a case in which “impossibility” was successfully asserted as a result of the September 11th attacks, and stated:
The doctrine of impossibility was applied after the September 11 terrorist attacks in Bush v. Protravel International , Inc., 192M.2d 743 , 747-748 (Civ. Ct., Richmond County 2002). Telephone communications had been disrupted throughout New York City after 9/11. As a result, the Plaintiff in the aforementioned case was precluded from timely canceling travel reservations. The Civil Court found that performance of the travel contract was rendered impossible for a period of time immediately following the 9/11 attack where New York City was in virtual lockdown. Id. at 747. (Hyperlink added.)
Finding that “Plaintiff’s inclusion of [two] causes of action in their complaint against Ms. O’Neil constitutes commercial tenant harassment under the law”, the Court also granted defendants’ cross-motion for summary judgment against landlord for “attempting to enforce a personal guarantee that [it knew] or reasonably should [have] know[n was] not enforceable pursuant to § 22-1005” under New York City Administrative Code § 22-902(a) (11) and (14). Thus, the claims asserted against the guarantor were stricken and the guarantor was awarded judgment for commercial tenant harassment.
