New York Update: How Force Majeure and Related Common Law Doctrines Are Applied in the COVID-19 Context

New York Update: How Force Majeure and Related Common Law Doctrines Are Applied in the COVID-19 Context

2.3.2021

By Stephanie L. Denker and Christie R. McGuinness

As the United States enters the tenth month of the COVID-19 pandemic, there are still many safeguards in place to minimize the spread of the virus, including, among other things, travel bans and executive orders limiting business operations, indoor dining and the size of gatherings. These measures have led to major conferences being conducted virtually, Broadway keeping its doors shut and the majority of sports arenas and stadiums operating with limited or no fans. Behind each of these events are contracts that parties have been unable to perform as originally contemplated due to the pandemic. New York has seen quite a bit of litigation surrounding these circumstances, with parties citing force majeure and related common law doctrines as bases to avoid liability for failure to perform their contractual obligations. This article provides an update on some recent New York cases impacting these salient legal issues.

COVID-19 Is a “Natural Disaster”

The Southern District of New York recently held that the COVID-19 pandemic qualifies as a “natural disaster.”^[1] The court noted that “[a]lthough neither the New York Court of Appeals nor the Second Circuit Court of Appeals has yet addressed whether the COVID-19 pandemic should be classified as a natural disaster, the Second Circuit has identified ‘disease’ as an example of a natural disaster, Badgley v. Varelas, 729 F.2d 894, 902 (2d Cir. 1984),” and courts in Pennsylvania have already determined that the COVID-19 pandemic qualifies as a natural disaster.^[2]

JN Contemporary Art LLC arose out of a contract to auction a painting at a May 2020 auction, which contained a termination provision that read:

“In the event that the auction is postponed for circumstances beyond our or your reasonable control, including, without limitation, as a result of natural disaster, fire, flood, general strike, war, armed conflict, terrorist attack or nuclear or chemical contamination, we may terminate this Agreement with immediate effect. In such event, our obligation to make payment of the Guaranteed Minimum shall be null and void and we shall have no other liability to you.”^[3]

The Southern District dismissed the lawsuit, finding that COVID-19 “and the regulations that accompanied it fall squarely under the ambit of” the termination provision, and therefore, the auctioneer was permitted to terminate the agreement and not pay the guaranteed minimum.^[4]

In rendering this decision, the Southern District noted that “a pandemic requiring the cessation of normal business activity is the type of ‘circumstance’ beyond the parties’ control that was envisioned by the termination provision. The exemplar events listed in Paragraph 12(a) include not only environmental calamities events such as floods or fires, but also widespread social and economic disruptions such as ‘general strike[s],’ ‘war,’ ‘chemical contamination,’ and ‘terrorist attack.’”^[5] The Southern District also looked at the common meaning of “natural disaster” and found that COVID-19 fits within the definitions set forth in Black’s Law Dictionary and Oxford English Dictionary.^[6]

The Southern District further found that “where nonperformance is excused by a contract’s force majeure provision, the implied covenant [of good faith and fair dealing] does not require substitute performance,”^[7] and that there was no breach of fiduciary duty because the scope of the duty of loyalty was modified by the contract, which “unambiguously entitled [the auctioneer] to terminate the consignment arrangement following a force majeure event.”^[8]

In sum, the Southern District dismissed the entire lawsuit seeking to compel a party’s compliance with an agreement because COVID-19 is a natural disaster and fell within the contract’s force majeure provision.

The Doctrines of Frustration of Purpose and Impossibility Are Likely No Excuse

Parties seeking to be excused from their contractual obligations can sometimes rely upon the common law doctrines of frustration of purpose and impossibility. However, some New York state courts have found that a tenant cannot rely upon these doctrines to excuse itself from paying rent in the wake of COVID-19.

For example, in 1140 Broadway LLC v. Bold Food LLC, the court granted summary judgment as to liability in favor of the landlord and found that neither the doctrines of frustration of purpose nor impossibility applied to excuse the tenant’s performance under the subject lease for office space on the 12th floor of the plaintiff’s building.^[9] The tenant, which manages and consults for a group of restaurants, stopped paying rent in February 2020, citing COVID-19 as the justification, and then vacated the office space in June 2020.

As to frustration of purpose, the court held that this situation “does not fit into the narrow doctrine of frustration of purpose.”^[10] The court stated:

“Simply put, defendants could no longer afford the rent because restaurants no longer needed the management help that the tenant provides. This is not a case where the office space leased was destroyed or where a tenant rented a unique space for a specific purpose that can no longer serve that function (such as a factory that was condemned after the lease was signed or a [sic] agreeing to rent costumes for a specific play to be performed at a specific theater on specific dates but the theater burned down before the first rental date).”^[11]

The court noted that this holding was limited to the subject lease, “where the tenant rented office space, the tenant’s industry experienced a precipitous downfall and the tenant . . . [was] no longer . . . able [to] pay the rent.”^[12]

With respect to the doctrine of impossibility, the court stated: “Many food establishments decided to shut down because of the financial consequences from both the pandemic and the public health orders, but that does not mean there was a ‘destruction of the subject matter’ contemplated in the contract at issue here, which was for office space on the twelfth floor of an office building.”^[13] The tenant “was not shut down by any public health directives” and, thus, “was one step removed from the governor’s public health orders relating to restaurants because their business assists restaurants.”^[14] Therefore, the court held that neither of these common law doctrines was applicable to excuse the tenant’s performance under the lease.

Similarly, in BKNY1, Inc. v. 132 Capulet Holdings, LLC, the court found that “[t]he mandatory closure of plaintiff’s restaurant business . . . by Executive Order No. 202.3 . . . did not relieve it of its contractual obligation to pay rent. Plaintiff has failed to cite – and the Court’s own review has not uncovered – any provision of the lease excusing it from timely and fully paying its rent during (and notwithstanding) the state-mandated closure of its business.”^[15] The court further found that the “doctrine of frustration of purpose is inapplicable under the circumstances,” noting that “a temporary closure of plaintiff’s business for two months (April and May 2020) in the penultimate year of its initial term could not have frustrated its overall purpose.”^[16] Likewise, the court found that the doctrine of impossibility of performance is not available to the plaintiff, noting that “[n]othing in the lease at issue permits termination or suspension of plaintiff’s obligation to pay rent in the event of the issuance of a governmental order restricting the use of the leased premises.”^[17] The court further stated: “[T]he lease specifically provides that plaintiff’s obligation to pay rent ‘shall in no wise be affected, impaired or excused because Owner is unable to fulfill any of its obligations under this lease . . . by reason of . . . government preemption or restrictions,’ which is the case here.”^[18]

In short, these two New York state courts have “decline[d] to step in and unilaterally modify the parties’ contract and tell the landlord that it should not be able to enforce the agreement it signed with a tenant.”^[19]

Takeaway

In light of these recent decisions, it is evident that New York courts are looking at each lawsuit on a case-by-case basis. Parties should therefore (1) determine whether the subject contract has a force majeure provision, (2) evaluate whether the force majeure provision contains language that would be triggered by the event at issue, including references to “natural disasters” and (3) assess whether other contractual defenses are available in light of the particular dispute at hand. We will continue to monitor relevant decisions from New York courts as litigation regarding the COVID-19 pandemic shows no signs of waning.

Stephanie Denker and Christie McGuinness are Saul Ewing Arnstein & Lehr litigation associates in its New York office, whose practice includes representing individuals and companies in complex commercial litigation filed in both state and federal courts.

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[1]. See JN Contemporary Art LLC v. Phillips Auctioneers LLC, No. 20-cv-4370, 2020 WL 7405262, at *7 (S.D.N.Y. Dec. 16, 2020).

[2]. Id. at n. 7 (citing Pennsylvania Democratic Party v. Boockvar, 238 A.3d 345, 370 (Pa. 2020); Friends of Danny DeVito v. Wolf, 227 A.3d 872, 889 (Pa. 2020)).

[3]. JN Contemporary Art LLC, 2020 WL 7405262, at *2.

[4]. Id. at *7-8.

[5]. Id. at *8.

[6]. Id. at *7.

[7]. Id. at *10.

[8]. Id. at *12.

[9]. 1140 Broadway LLC v. Bold Food LLC, 2020 N.Y. Misc. LEXIS 10358 (Sup. Ct., N.Y. Co. Dec. 3, 2020).

[10]. Id. at p. 3.

[11]. Id.

[12]. Id.

[13]. Id. at p. 4.

[14]. Id.

[15]. BKNY1, Inc. v. 132 Capulet Holdings, LLC, No. 508647/2016, 2020 NYLJ LEXIS 1589, at pp. 2–3 (Sup. Ct., Kings Co. Sept. 23, 2020) (directing plaintiff to pay rent).

[16]. Id. at p. 3.

[17]. Id. at p. 4.

[18]. Id.

[19]. 1140 Broadway LLC, 2020 N.Y. Misc. LEXIS 10358 at p. 5.