Coronavirus COVID-19 Litigation

Consumer and business agreements are the backbone of the legal system. Everyone has been involved with contracts for goods and services at some point or another e.g. construction contracts, real estate, internet, purchase of goods, auto loans, social media, influencer, employer-employee agreements, etc. The Coronavirus continues to wreak havoc through business disruption and its attendant massive employment losses including without limitation, restaurant and food service closures and the shuttering of all aspects of the travel and hospitality industries. Certain contractual agreements are challenged by potential fundamental changes due to the economic dislocation and disarray in the service economy.

What arises now in the storm of the global Pandemic are the multiple and creative attempts to accommodate contracts for these unforeseen changes in the business landscape. COVID-19 has cut off the performance and payment of a vast number of agreements to the detriment to all parties in contracts, from the primary parties to numerous essential third parties.

The following are certain legal claims and defenses implicated by COVID-19.

Frustration of Purpose. New York law permits a party to assert as a an affirmative defense to a breach of contract claim that the purpose for which the parties agreed was frustrated, e.g. the involuntary closure of business and its supply. The food service and travel industries are specific examples that have been decimated by the Coronavirus.

Impossibility of Performance is a defense where a party to the contract cannot purchase a product or service that it must resell or deliver even if under normal circumstances it would. Here the purpose of the parties’ agreement is not merely frustrated, but rendered impossible. Despite these defenses the breaching party should still be ready to show that it attempted to mitigate its damages: i.e. found an alternative supply or provision of service, that would allow it to perform.

A major context we have already seen is the refusal of a party to return a deposit of the other for future services, or the delivery of future products. Other statutory law in New York governs the non-refundable nature of deposits and purchase prices.

The concept of efficient breach. As an alternative to asserting the above defenses, New York law provides for the “efficient breach” of a contract. Similar to a mitigation of damages defense, this defense recognizes that there are circumstances where it is more economically reasonable to breach the contract and suffer the damages than to perform. This in effect and practice is an admission the payment of some damages. Once the potential exposure to the payment of damages is calculated, it is a measured choice between two evils.

Force Majeure. The successful legal defense of Force Majeure performance on a contract is excused for circumstances that were unforeseen by a party. Examples in contracts are include without limitation “acts of G-d,” work stoppage from striking, war, natural disasters, and government orders or regulations. If a party has suffered one of these unforeseen events, it can assert this defense in an attempt to avoid performance. Performance may include payment.

If the Coronavirus (COVID-19) has taught us anything, it is the absolute necessity to have an “out” of a contract or its provision(s). While the effect of a global Pandemic can almost automatically call for the restructure or renegotiation of contracts long-term, this critical clause can mitigate disastrous, immediate and short-term effects of the non-performance by a party. Specific examples can include payment on a contract when the party has no money or conducting work thereon having no money to pay workers, vendors, suppliers, etc.

New York Law on Force Majeure

“[A] force majeure event is an event beyond the control of the parties that prevents performance under a contract and may excuse nonperformance.” Beardslee v. Inflection Energy, 25 N.Y.3d 150, 154 (2015). Force majeure clauses excuse non-performance where the reasonable expectations of the parties have been frustrated due to circumstances beyond their control. See Kel Kim v. Cent. Mkts., 70 N.Y.2d 900, 902, (1987); United Equities v. First Natl. City Bank, 52 A.D.2d 154, 157 (1976), affd. 41 N.Y.2d 1032 (1977). Under New York law, force majeure clauses are “to be narrowly construed.” Reade v. Stoneybrook Realty, 63 A.D.3d 433, 434 (1st Dept. 2009).

New York courts technically do not let parties out of the contract merely with the presence of the clause in the contract. The asserting party must still technically show the specific inclusion of the actual event that stops the party from performing. Reade, 63 A.D.3d at 434 (citing Kel Kim Corp. 70 N.Y.2d at 902-903). That said, a force majeure provision must be in the contract. See General Electric Company v. Metals Resources Group Ltd., 293 A.D.2d 417 (1st Dept. 2002).

However, with all of the above precedent said, it remains to be seen how strictly the state and federal courts will require performance on contracts under Coronavirus circumstances. It is our opinion that Courts may be lenient in situations, and not simply want the Bankruptcy Court docket to explode because of draconian adherence to contracts under pre-virus economic conditions.

Historically though, New York courts first consider the intent of the parties before considering a party’s need to exit a contract. Route 6 Outparcels v. Ruby Tuesday, 88 A.D.3d 1224, 1225 (3d Dept. 2011). The nature and scope of the parties intent and whether the clause protects one or both parties is of importance.

New York State, City and County Regulations

New York governments have rushed to implement numerous laws and regulations requiring businesses and individuals to cease their operations to avoid the spread of the Coronavirus. Businesses like heath clubs, restaurants, casinos, cinemas, theaters and some construction have been shuttered, and gatherings of all types have been delayed or cancelled outright. These actions by the state and local governments are clearly disrupting these contracts implicating the clauses like force majeure. Defining the basis for the enforcement of these provisions can be creative. The magic words now can be “governmental prohibition.” Reade, 63 A.D.3d at 433 (“One of the listed acts that would trigger this clause was ‘governmental prohibitions.’ [A] judicial TRO falls within the meaning of the term ‘governmental prohibition,’ and the time during which such TRO was in effect must be included in computing the starting date of the rent abatement.”).

Summary

So the elements to remember when navigating through these untested waters are: 1) the existence of and actual wording of the force majeure provision; 2) The parties’ intent at the time of contracting; and (3) if no part of the contract can be salvaged or performed under the specific circumstances.

The laws supporting Contract interruption and cancellation are about to be tested. No New York Court has yet ruled in light of the Coronavirus, but it is expected that many will be lenient in enforcing provisions that were contemplated pre-virus. The Courts in New York have historically construed these “out clauses” rather narrowly, but if any of them attempt to cause a party to strictly adhere to a pre-virus contract, it will take these government regulations and lawyer creativity to manage through the storm.

If you are a party to a contract and have any questions regarding the effect of the Coronavirus (COVID-19) on litigation or the law, feel free to call us at (212) 537-6612. In New York City, we handle these claims and defenses i.e. in Manhattan, Kings, Queens, Richmond, Bronx, in Nassau and Suffolk Counties, Westchester, Orange, Rockland and certain upstate counties of New York as well as New Jersey.