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(347)-508-9316IMPOSSIBILITY OF PERFORMANCE AND FRUSTRATION OF PURPOSE
Let’s face it, COVID was a CRAZY TIME! Although the “emergency” phase of the ongoing pandemic has seemingly (hopefully) passed, many businesses are still reeling from the lasting effects of those early and volatile Spring, 2020, days, including: loss of business revenue, loss of work force/employees, inability to maintain/afford physical facilities and mass consumer diversion to the online marketplace. The accommodation and food services industries had the largest initial fall in turnover. As many former patrons watched in horror, many beloved, established local businesses had to close altogether. But what about business contracts that existed prior the pandemic that could not be fulfilled during the pandemic due to impossibility of performance or frustration of purpose through no fault of either party? Before we answer that question, let’s do a brief recap of important dates in the early days of the pandemic:
On March 1, 2020, the first case of COVID-19 was confirmed in the State of New York in Manhattan, New York County, City of New York; On March 7, 2020, New York Governor Andrew M. Cuomo found, pursuant to Section 28 of Article 2-B of the Executive Law, that a disaster was impending in New York State, for which the affected local governments were unable to respond adequately, and thus declared a state disaster emergency for the entire State of New York; On March 20, 2020, New York Governor Andrew M. Cuomo issued a state-wide stay-at-home Executive Order. All non-essential businesses were ordered to close and all non-essential gatherings were cancelled or postponed; By March 24, 2020, over 25,000 cases of COVID-19 had been reported in New York State; On April 6, 2020, New York Governor Andrew M. Cuomo’s state-wide stay-at-home Executive Order was extended to April 29, 2020; On April 16, 2020, Governor Cuomo’s state-wide stay-at-home Executive Order was further extended to May 15, 2020; On May 14, 2020, New York Governor Andrew M. Cuomo’s state-wide state of emergency was extended to June 13, 2020; According to the Centers for Disease Control and Prevention, New York was an early epicenter of the COVID-19 pandemic in the United States, with approximately 203,000 cases of laboratory-confirmed COVID-19 reported in New York City alone in the first three (3) months of the pandemic from March 1, 2020-June 1, 2020. The crude fatality rate in New York City was 9.2% overall and 32.1% among hospitalized patients. As a result, it was deemed unsafe and unadvisable for non-essential travelers to enter New York State generally, and the greater New York City area specifically, during this state of emergency.
Pursuant to data compiled by the New York State Comptroller’s Office in 2020, 45% of small businesses in New York State experienced a large negative effect from the coronavirus pandemic. New York’s share was the second-highest among the states, 12 percentage-points above the national average. Another 41% of New York small businesses reported moderate negative effects from the pandemic, while only 5% experienced positive effects, and 10% indicated that the pandemic had little or no impact on their business at all. Other survey results related to business operations in 2020 included: half of New York small business respondents indicated they had paid employees who worked from home; a quarter saw operating capacity decline by half or more from a year prior; another 35 percent saw smaller declines; and 18% of respondents reported having either no cash on hand for business operations, or only enough for two weeks or less. Another 17% reported having enough for three to four weeks and 24% had cash adequate for one to two months.
“Impossibility” and “frustration of purpose” refer to two distinct doctrines in contract law, but both require unforeseeability. Gander Mtn. Co. v Islip U-Slip LLC, 923 F Supp 2d 351 (ND NY 2013). In order to invoke the doctrine of frustration of purpose, the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense. See Warner v. Kaplan, 71 A.D.3d 1, 6, 892 N.Y.S.2d 311 (1st Dept. 2009); Shmaltz Brewing Co., LLC v. Dog Cart Mgt. LLC, 202 A.D.3d 1349, 1352, 163 N.Y.S.3d 659 (3rd Dept. 2022); Arons v. Charpentier, 36 A.D.3d 636, 637, 828 N.Y.S.2d 482 (2nd Dept. 2007); 407 E. 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 282, 296 N.Y.S.2d 338, 244 N.E.2d 37 (1968). The doctrine of frustration of purpose applies in a contract action when a change in circumstances makes one party’s performance virtually worthless to the other, frustrating its purpose in making the contract. Shmaltz Brewing Co. (supra).
The law of impossibility, on the other hand, provides that performance of a contract will be excused if such performance is rendered impossible by intervening governmental activities, but only if those activities are unforeseeable. Pleasant Hill Developers, Inc. v. Foxwood Enters., LLC, 65 A.D.3d 1203, 1206, 885 N.Y.S.2d 531, quoting Matter of A & S Transp. Co. v. County of Nassau, 154 A.D.2d 456, 459, 546 N.Y.S.2d 109; see Kel Kim Corp. v. Central Mkts., 70 N.Y.2d 900, 902, 524 N.Y.S.2d 384, 519 N.E.2d 295. A party seeking to rescind a contract must show that the intervening act was unforeseeable, even if the intervening act consisted of the actions of a governmental entity or the passage of new legislation/ Pleasant Hill Developers, Inc. (supra); Matter of A & S Transp. Co. (supra) ; see also Four Asteria Realty, LLC v. BCP Bank of N.Am., 71 A.D.3d 822, 822–823, 897 N.Y.S.2d 487; Inter–Power of N.Y. v. Niagara Mohawk Power Corp., 208 A.D.2d 1073, 1074, 617 N.Y.S.2d 562.
I’m going to jump ahead and tell you that there is no clear answer as to when impossibility of performance or frustration of purpose due to COVID applies, but the above serves as a good beginner’s guide. The truth is that cases involving COVID are still making their way through the judicial system and each will be judged on a case-by-case basis, determined by the facts and circumstances surrounding those particular matters. In the context of the coronavirus outbreak, impossibility may provide grounds for excusing performance … even then, the party invoking the doctrine must show that the measures were unforeseeable and the risk associated with them could not have been built into the contract. See Gregg L. Weiner, et al., New York Contract Law Remedies in the Face of Disruption Caused by COVID-19, March 10, 2020.
The trend of reported cases appears to be, however, not to allow parties to lean on COVID as a crutch. A number of Courts have rejected the impossibility defense as an excuse for tenants not performing contractual obligations, such as payment of rent, during the COVID-19 pandemic. A/R Retail Llc v. Hugo Boss Retail, 72 Misc 3d 627 (2021). Since force majeure provisions in the retail tenant’s commercial lease contemplated business disruptions due to government actions, reduced business resulting from government orders responding to the COVID-19 pandemic was deemed foreseeable and, thus, alleged impossibility of tenant’s performance during imposed shutdown did not warrant rescission of tenant’s lease.
In CW A&P Mamaroneck LLC v. PFM WC-1f, LLC, 74 Misc 3d 1222(A) (2022), the Court rejected Defendants’ argument that a shutdown of businesses due to the COVID-19 pandemic gave rise to impossibility of performance in the absence of documentary evidence conclusively establishing that performance under the contract was impossible as a consequence of the shutdown of businesses.
In Fives 160th, LLC v. Zhao, 204 A.D. 3d 439 (1st Dept. 2022), the Court stated that “we have already determined that the pandemic cannot serve to excuse a party’s lease obligations on the grounds of frustration of purpose or impossibility (see 558 Seventh Ave. Corp. v. Times Square Photo Inc., 194 A.D.3d 561, 562, 149 N.Y.S.3d 55 [1st Dept. 2021], appeal dismissed 37 N.Y.3d 1040, 154 N.Y.S.3d 564, 176 N.E.3d 301 [2021]). “Although the pandemic did make it more difficult and less profitable for Defendants to run their business, they were never prevented from using the space or operating their restaurant (see Center for Specialty Care, Inc. v. CSC Acquisition I, LLC, 185 A.D.3d 34, 42–43, 127 N.Y.S.3d 6 [1st Dept. 2020]). Nor did the lease contain a force majeure clause, and this Court may not add or imply such a clause (see Morlee Sales Corp. v. Manufacturers Trust Co., 9 N.Y.2d 16, 19, 210 N.Y.S.2d 516, 172 N.E.2d 280 [1961]; Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P., 60 A.D.3d 61, 66, 869 N.Y.S.2d 511 [1st Dept. 2008], affd 13 N.Y.3d 398, 892 N.Y.S.2d 303, 920 N.E.2d 359 [2009]).
In 9-11 Stanton Street Realty Corp. v. Stanton St. Cleaners, Inc., 2023 WL 8939143 (2023), the Court found that although the tenant lost business during the COVID–19 pandemic, it did not demonstrate that the purpose of the contract had been completely thwarted, and thus the defenses of frustration of purpose, force majeure and impossibility of performance were inapplicable.
All that being said, our firm has had success with one particular COVID-19 related matter thus far- a Lease Agreement wherein an out-of-town visitor entered into an Agreement to rent a beach house for the “summer” for a term of approximately six (6) months.
Specifically: Lessee-Tenant and Lessor-Landlord entered into a Lease Agreement dated December 3, 2019, with a term beginning on April 15, 2020, and ending on October 31, 2020. Lessor-Landlord owned, operated, maintained and managed a rental property in Fire Island Pines, NY 11782. The Lease Agreement stated that the total rent amounting to $48,000.00 was payable in advance as follows:$4,000.00 due with signed lease; $14,700.00 due by January 15, 2020; $14,700.00 due by February 15, 2020; and $14,600.00 due by March 15, 2020 (this included a 10% refundable security deposit along with a 10% utility deposit).
The Lease Agreement also required the Lessee-Tenant to pay the following utilities and services when billed: gas, water, electricity, propane, pool & hot tub services, internet, satellite TV as billed by the Lessor-Landlord and weekly housekeeping as billed by the service provider. These charges were to be added to and payable as rent.
Finally, the Lease Agreement stated that Lessor-Landlord agreed that if Lessee-Tenant paid the rent and was not in default under the Lease, Lessee-Tenant may peaceably and quietly have, hold and enjoy the Premises for the Term of the Lease.
Pursuant to the Lease Agreement, Lessee-Tenant’s term of lease was scheduled to begin on April 15, 2020, right in the middle of New York’s state of emergency and stay-at-home Order. As such, and through no fault of his own, and despite having already paid the full amount of the Lease Agreement along with security and utility deposits in advance, Lessee-Tenant was unable to take possession of the Property as anticipated by the Lease Agreement.Furthermore, although Lessee-Tenant made multiple demands for the full return of his advance payments and deposit under the Lease Agreement totaling $48,000.00, only approximately $15,400.00 had been returned.
Our firm commenced an action by filing a Summons and Verified Complaint against the Lessor-Landlord in 2021, seeking a money judgment for damages resulting from breach of the Lease Agreement; unjust enrichment; bad faith; impossibility of performance; frustration of purpose; and breach of New York’s General Obligations Law. Following submission of our Motion for Summary Judgment and Defendant’s Cross-Motion to Dismiss, the Supreme Court, Suffolk County, rendered a decision in 2023 in favor of Plaintiff for a money judgment plus interest from the date of the Lease Agreement, finding that Plaintiff was unable to take possession of the property pursuant to the Lease Agreement as a result of New York’s state of emergency and stay-at-home Executive Order. As of the date of this writing, our client is still waiting to collect on that judgment, but at least the law is on his side. HOORAY!
An updated report from the New York State Comptroller’s Office in 2021 cited data showing 78% of businesses with less than 500 employees were still enduring a negative impact due to the pandemic one year after the coronavirus took hold of New York. The report stated that the percentage of businesses experiencing an overall negative impact due to the pandemic had decreased from 94%, but the total number of negatively impacted businesses due to the pandemic hovered at 80%. It was clear that businesses were (and still ARE) hurting.
As previously stated, cases involving COVID-19 contracts are still making their way through the judicial system and the caselaw as to what constitutes “impossibility” or “frustration of purpose” for business contracts during COVID may yet expand or narrow. In addition, for every one reported case there are likely hundreds (if not thousands) of unreported cases involving similar contract disputes which settle early or never get reported. Although the trend is to uphold agreements pursuant to the intentions of the parties and read exceptions narrowly, our office was fortunately able to prevail in one particular case where frustration of purpose and impossibility of performance allowed our client to recoup his losses (with interest). It will certainly be interesting to see where the caselaw goes from here.
