Commercial Contracts and COVID-19: Force Majeure, Frustration of Purpose and Impossibility of Performance
March 19, 2020
COVID-19 will continue to impact business relationships around the world. As governments implement restrictions to combat this public health crisis, it is important to understand how both the pandemic itself and any responses to it might impact contractual obligations. Contracting parties might find themselves in limbo as they try to balance public safety and their financial obligations.
This alert will address the following concepts and defenses to performance of contract under New York law: force majeure, frustration of purpose and impossibility of performance. In short:
- Force majeure clauses in contracts exist to protect parties from being held to performance when an event that is outside of their control occurs and inhibits the parties’ ability to perform.
- The defense of frustration of purpose to contractual performance exists to protect parties from being held to performance when an event occurs, by no fault of the parties to a contract, that significantly changes the nature of the rights and obligations of the contracting parties.
- The defense of impossibility of performance exists to protect parties from being held to performance when intervening events make performance under a contract impossible.
Force Majeure Clauses
Under New York law, force majeure clauses function to relieve a contractual party’s liability when an extreme and unforeseeable event that is beyond a party’s control occurs and frustrates the expectations of the parties to a contract.1 The applicability of a force majeure clause in contract depends completely upon the language of the clause itself. Most courts will interpret force majeure provisions narrowly.2 Should the force majeure provision specifically describe the event that has occurred, a party will likely be excused from performance.3 On the other hand, if the force majeure provision contains a general catch-all phrase along with specifically described events (e.g. “…or other similar causes beyond the control of such party…” and “…unable to timely perform any of its obligations hereunder for any reason, including…”), courts will not give the general catch-all phrase its most expansive meaning, but will hold the clause to “apply only to the same general kind or class as those [events] specifically mentioned.”4
Force majeure clauses are express clauses and cannot be implied into a contract. It follows that the most important thing to do is to read the contract in question and determine whether a force majeure clause exists and, if it does exist, look to the specific events that are enumerated (and whether there is a general catch-all phrase). A few examples of force majeure clauses are provided at the end of this alert.
Should a contract not contain a force majeure clause, a party can seek other defenses, such as frustration of purpose and impossibility of performance.
Frustration of Purpose
The doctrine of frustration of purpose applies when an unforeseeable event occurs, by no fault of a party, that precludes the purpose of the contract itself. Under New York law, the frustrated purpose must have been so wholly the foundation of the contract that, without it, the transaction would not have made sense.5 For example, if a party were to enter into a lease with another party to use some premises as an office space and then later discover that the building’s certificate of occupancy only allows for residential use, there is an argument that the purpose of the lease (the use of the premises as an office space) has been frustrated.6 However, this defense is not available when the event itself that prevented performance of the contract was foreseeable and could have been addressed in the contract.7 If COVID-19 or any response to it were to obviate the purpose of a contract, a party to that contract might have a valid defense to performance under the doctrine of frustration of purpose.
Impossibility of Performance
The defense of impossibility of performance only exists under New York law when the subject matter of the contract has been destroyed or the means of performing the contract make performance of the contract impossible.8 This defense is applied narrowly.9 When difficulty or impossibility10 in performance of a contract is a result of financial hardship or economic difficulty only, performance of the contract will not be excused under impossibility of performance.11 Again, like with the defense of frustration of purpose, the event that causes the impossibility of performance must be unforeseeable.12 If COVID-19 or any response to it were to destroy the means of performing a contract or the subject matter of the contract, a party to that contract might have a valid defense to performance under the doctrine of impossibility.
- Review contractual language to determine whether a force majeure clause exists and what the defined circumstances are.
- Determine whether COVID-19 would be covered and what the circumstances are in your area – declared state of emergency, shelter in place, travel bans, etc.
- Check the notice provisions and determine how notice should be effected.
- Contact your counterparties to attempt to negotiate the situation.
- Contact outside counsel as necessary.
Examples of Force Majeure Clauses
Notwithstanding anything to the contrary contained herein, [defendant] shall not be liable to [plaintiff] if Promotion is not able to take place or [plaintiff] is rendered unable to timely perform any of its obligations hereunder for any reason, including, without limitation, strikes, boycotts, war, Acts of God, labor troubles, riots, and restraints of public authority.13
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14.1. If at any time before the Contractual Delivery Date the construction of the Unit or any performance required as a pre-requisite to Delivery, or other performance hereunder is delayed due to a Force Majeure event, then the Contractual Delivery Date, or such performance, shall be postponed for the period of time during which construction of the Unit, or such performance is directly and unavoidably delayed by the same.
In this Clause, “Force Majeure” means an exceptional event or circumstance:
- which is beyond the Builder’s or the Purchaser’s party’s control;
- which the Builder or the Purchaser (as the case may be) could not reasonably have foreseen before entering into the Contract;
- which, having arisen, the Builder or the Purchaser (as the case may be) could not reasonably have avoided or overcome; and
- which is not substantially attributable to the Builder or the Purchaser (as the case may be) or its subcontractors or suppliers.
Force Majeure may include, but is not limited to, exceptional events or circumstances of the kind listed below, so long as conditions (a) to (d) above are satisfied:
- war, hostilities (whether war be declared or not), invasion, act of foreign enemies;
- rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war;
- riot, commotion, disorder, strike or lockout by persons other than the Builder’s personnel and other employees of the Builder and sub-contractors;
- munitions of war, explosive materials, ionising radiation or contamination by radio-activity, except as may be attributable to the Builder’s use of such munitions, explosives, radiation or radio-activity;
- fire or explosion (unless caused by the negligence of the Builder); and
- natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity.14
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“Event of Force Majeure” means any event outside the control of a Party such as earthquake, flood hurricanes, tidal waves war or war-like hostilities, mobilization or general military call-up, acts of Government, civil war, revolution, rebellion, insurrection or riots, sabotage, requirements of civil or military authorities, blockades, embargoes, vandalism, epidemics, exceptional weather conditions not included in normal planning, nationwide general strikes, nationwide overtime bans or other nationwide labour actions, and delays in the delivery by a Subcontractor of main Components for the Vessel so long as the delays are not caused by any act or omission of Builder.15
If you should have any questions about these matters, please contact Jack Yoskowitz at 212-574-1215 or email@example.com, or your primary Seward & Kissel LLP attorney.
Seward & Kissel has established a COVID-19 Resource Center on our web site to access all relevant alerts that we distribute.
1 Team Mktg. USA Corp. v. Power Pact, LLC, 41 A.D.3d 939, 942 (2007).
2 See Reade v. Stoneybrook Realty, LLC, 63 A.D.3d 433, 434 (2009).
4 Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902-903 (1987) (“The principle of interpretation applicable to such clauses is that the general words are not to be given expansive meaning; they are confined to things of the same kind or nature as the particular matters mentioned (see 18 Williston, Contracts § 1968, at 209 [3d ed 1978])).
5 See Warner v Kaplan, 71 A.D.3d 1, 6 (2009).
6 See Jack Kelly Partners LLC v Zegelstein, 140 A.D.3d 79, 81 (2016).
8 See 407 East 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 281 (1968).
9 See Kel Kim Corp., 70 N.Y.2d at 902.
10 Please note that other jurisdictions excuse performance where it is impracticable (e.g. if it would require an unreasonable expense on the part of the party).
11 See 407 East 61st Garage, Inc., 23 N.Y.2d at 281-282.
12 See Kel Kim Corp., 70 N.Y.2d at 902.
13 See Team Mktg. USA Corp., 41 A.D.3d at 942. In this case, the court found that the event in question that caused defendant’s inability to perform was different in kind and nature as the events specified in the force majeure clause and was not an unforeseeable event beyond the parties’ control.
14 Here, there is no specific mention of pandemic, disease or governmental regulation, but there is a general phrase: “may include, but is not limited to.” If a court were to determine that COVID-19 or any response to it were enough alike in nature and kind as those specific events listed, it might find this force majeure clause applicable.
15 This clause specifically mentions both “epidemics” and “acts of Government” so it is likely that it applies specifically to COVID-19 and any response to it.