Attorneys are being inundated with questions about how the Coronavirus impacts the performance/nonperformance of contractual obligations. In most situations, the answer lies in the contracts themselves in “force majeure” provisions.
New York’s highest court has described a “force majeure” clause as a contractual provision “excusing nonperformance due to circumstances beyond the control of the parties”. Kel Kim v. Central Markets, 70 N.Y.2d 900, 902 (1987). These force majeure clauses are narrowly construed by New York courts “due in part to judicial recognition that the purpose of contract law is to allocate the risks that might affect performance and that performance should be excused only in extreme circumstances”. Id.
Many contracts (e.g., construction contracts, leases) contain a force majeure clause, but not all such clauses set forth the same set of circumstances which will excuse performance by a contracting party. The clauses also go by different subject headings such as “Postponement of Performance” or “Inability to Perform” or “Unavoidable Delay” or “Delays and Extensions of Time”.
Very few of the force majeure clauses typically seen in contract negotiations excuse performance based on an epidemic or pandemic, but most contain catch-all provisions such as any “event beyond the parties’ reasonable control” that may end up being construed by some courts (depending on the balance of the force majeure provision and there being no contradictory terms elsewhere in the agreement) as excusing or delaying performance by a party or parties due to the Coronavirus. Some force majeure clauses specifically provide that no such defined force majeure event serves to excuse a party from the mere payment of money which is a favorite clause of landlords’ attorneys.
If there is no force majeure provision in a contract, the common law doctrine of “impossibility of performance” may afford a party relief for nonperformance due to the impacts of the Coronavirus. However, impossibility of performance is narrowly construed by the New York courts and “excuses a party’s performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.” Id.
The bottom line with respect to the interplay between force majeure provisions and the Coronavirus in existing contracts is that clients and counsel need to carefully review the agreement at issue to determine if it contains a force majeure clause and what events are covered by such clause. Moving forward with respect to prospective agreements, consideration of including “epidemics” in force majeure provisions is the new reality.
For more information, contact Patrick J. O’Sullivan.