Applicability of Force Majeure and Impossibility in the Wake of COVID-19 Under New York Law

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In the wake of the recent COVID-19 pandemic, and its economic disruption, some contracting parties may seek to be excused from performance under their contracts. For contracts subject to New York law, including insurance contracts, New York courts take a narrow view of defenses to contractual obligations based upon “unforeseen events” outside the control of the parties.

The effect of unforeseen/unforeseeable events on contractual performance may be provided for by the contract itself. Some contracts include a specific force majeure clause that provides express excuses to performance due to events outside the parties’ control, such as war or natural disasters.  In New York, “[i]nterpretation of force majeure clauses is to be narrowly construed and ‘only [applies] if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused.’”[1] Accordingly, the party seeking to avoid performance must show that the event in question is specifically set forth in, or of the type expressly contemplated by, the contract’s force majeure clause, and that the event actually prevented its performance.

Some contracts specifically include “pandemics” or “epidemics” in the contract’s force majeure clause (together with acts of war, natural disasters, etc.). If neither is specifically stated, the party seeking to avoid performance would have to show that pandemics and epidemics otherwise fall within the intention of the contract’s force majeure clause, which may be difficult because of the New York requirement that the clause “specifically identify” the event in question.    

If the contract does not have a force majeure clause, or if the contract’s force majeure clause does not specifically cover the event in question, New York law might still provide a defense premised upon impossibility of performance. The defense, however, is a very narrow one. Under longstanding New York law, “the excuse of impossibility of performance is limited to the destruction of the means of performance by an act of God, vis major [i.e., external, outside force], or by law. Thus, where impossibility or extreme difficulty of performance is occasioned only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy, performance of a contract is not excused.”[2] 

The circumstances giving rise to the inability to perform must be both “beyond that party’s control” and the result of “an unanticipated event that could not have been foreseen or guarded against in the contract.”[3] In this regard, New York courts have long held that an “act of God” is “occasioned exclusively by natural causes, such as could not be prevented by human care, skill and foresight.”[4] Similarly, governmental acts can give rise to an impossibility defense only if those acts were unforeseeable at the time the contract was executed, and the party affected by the government action did not consent to it or play a part in causing that action to happen.[5] If the impossibility is temporary, however, it at most only suspends performance during that period, not permanently.[6]   

New York courts are generally reluctant to permit a defense based upon impossibility of performance. For example, one New York appellate court has held that the defense did not apply to the 2008 financial crisis because it “could have been foreseen or guarded against in the” contract.[7] Other New York courts have held that “[t]he tragic events of 9/11 do not relieve defendants of their obligations under the lease. . . .  A down turn in the economy partially resulting from the 9/11 tragedy . . . is not a valid reason for relieving a party from its responsibilities under a lease” because those events did not prevent the tenant from utilizing the property in question in the manner bargained for in the lease.[8] 

With respect to governmental actions, one court has explained that “[t]he paradigm case of a governmental action causing an impossibility is . . . where a governmental agency passes a new law or regulation prohibiting performance sometime between the point of contracting and performance.”[9] New York courts have nonetheless repeatedly held that failure to obtain necessary governmental approvals or changes in zoning laws are not the types of unforeseeable governmental actions that give rise to an impossibility defense.[10] By contrast, New York courts are more likely to apply the impossibility defense where government action specifically targets one or more of the parties without their consent, such as when the government seizes assets described in the contract.[11] 

For purposes of the impossibility defense, a court could find that a viral pandemic is an “act of God” or “act of nature” as defined by New York law. But New York courts could potentially distinguish the coronavirus, and losses directly related to illnesses, from any resulting economic downturn caused by events only relating to the outbreak (such as business interruption, lost sales, etc.) and find that a failure to perform due solely to resulting economic downturns is not excused. Even unforeseeable governmental action—e.g., a full or partial shutdown of businesses in New York—may not serve as a basis for an impossibility defense if the action was not specifically targeted at the contracting parties, as opposed to the public at large and did not directly result in their inability to perform. 

 

[1] 63 A.D.3d 433, 434 (1st Dep’t 2009) (quoting 70 N.Y.2d 900, 902-03 (1987)).

[2] 23 N.Y.2d 275, 281 (1968); see also 70 N.Y.2d at 902; 159 A.D.3d 645, 645 (1st Dep’t 2018); 115 A.D.3d 197, 200 (1st Dep’t 2014).

[3] 155 A.D.3d 831, 833 (2d Dep’t 2017).

[4] 278 A.D.2d 571, 574 (3d Dep’t 2000); see also, e.g., 29 N.Y. 115, 119 (1864).

[5] E.g., 131 A.D.3d 1228 (2d Dep’t 2015); 18 F.3d 91, 95 (2d Cir. 1994); 503 F. Supp. 2d 687, 696 (S.D.N.Y. 2007).

[6] 2000 U.S. Dist. LEXIS 1883, at *6-7 (S.D.N.Y. Feb. 23, 2000); 192 Misc. 2d 743, 752 (N.Y. Civ. Ct. 2002).

[7] 68 A.D.3d 562, 562 (1st Dep’t 2009); see also, e.g., 2011 N.Y. Misc. LEXIS 5053 (N.Y. Sup. Ct. Oct. 24, 2011).

[8] 2004 N.Y. Misc. LEXIS 1544 (N.Y. Sup. Ct. Aug. 9, 2004); see also 6 Misc. 3d 382 (N.Y. Sup. Ct. 2004).

[9] 25 F. Supp. 2d 175, 191 n.10 (S.D.N.Y. 1998).

[10] 71 A.D.3d 822, 822-23 (2d Dep’t 2010); 65 A.D.3d 1203, 1206 (2d Dep’t 2009).

[11] 18 F.3d at 95.