March 23, 2020
When courts across New York reopen in the wake of COVID-19, they will be called upon to navigate a likely flood of force majeure defenses. Businesses, lawyers, and lawmakers alike will watch with keen eyes to see how the defense stands up in our new shared reality. In this article, we will survey force majeure jurisprudence in New York and preview how courts may treat a party’s defense of force majeure occasioned by the COVID-19 outbreak and its related fallout.
Force majeure clauses excuse a party’s nonperformance when extraordinary events or circumstances prevent a party from fulfilling its contractual obligations. The applicability of force majeure clauses is contract-specific and the defense is a relatively narrow one. In determining the applicability of a force majeure clause, New York courts generally consider: (1) whether the specific event or type of event preventing performance was listed in the force majeure clause; (2) whether the risk of nonperformance was foreseeable; and (3) whether performance was truly impossible and not merely impracticable or economically difficult.
It is conceivable that, faced with a rush of force majeure defenses, courts may loosen or tighten certain aspects of their analysis to account for new market realities or public policies in the wake of COVID-19. While it is impossible to predict with precision how courts will react to this unprecedented global event, the following cases offer a preview of how New York courts generally contend with force majeure clauses and how they may tackle the likely surge in parties invoking the defense.
- In Kel Kim Corp. v. Cent. Markets, Inc., 519 N.E.2d 295 (1987), the New York Court of Appeals held that a lessor’s inability to procure required insurance as a result of the liability insurance crisis of the 1980s was not covered by the lease’s force majeure clause. The Court of Appeals noted that, even despite the force majeure clause’s catchall proviso “or other similar causes beyond the control of such party,” the events and circumstances listed in the force majeure clause were “different in kind and nature from [lessor’s] inability to procure and maintain public liability insurance,” as the listed events pertained more to the party’s ability to conduct day-to-day operations on the premises.
- In Duane Reade v. Stoneybrook Realty LLC, 63 A.D.3d 433 (1st Dept. 2009) the First Appellate Division held that a judicial temporary restraining order (TRO) falls within the meaning of the term “governmental prohibition” as listed in the force majeure clause of a lease. In the case, a tenant sought a rent abatement due to its landlord’s delay in delivering possession of the premises. One of the reasons for the delay was a 40–day TRO issued after the events of 9/11 which prohibited construction at the premises. The force majeure clause provided that certain events beyond the control of the landlord shall be added to the time for delivery of the premises, with one such event being “governmental prohibitions.” The trial court held that the force majeure provision did not apply to judicial TROs. The First Appellate Division reversed, holding that “certainly, 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.”
- In Team Marketing U.S.A. Corp. v. Power Pact LLC, 41 A.D.3d 939 (3d Dept. 2007), the Third Appellate Division held that catchall language in a force majeure clause that excused performance “for any reason including, without limitation, strikes, boycotts, war, Acts of God, labor troubles, riots, and restraints of public authority,” did not include a third party’s rescheduling various events. In the case, the plaintiff agreed to staff various Toyota promotional events based on a proposed schedule that was incorporated into the contract. After the first event, Toyota changed the proposed schedule. The defendant attempted to excuse its nonperformance on the basis that the force majeure clause included the catchall “for any reason.” The Court rejected the defense, holding that the catchall language did not cover the rescheduling of the promotion schedule as this was not similar in nature to the events specifically enumerated in the force majeure clause.
- Similarly, in In Re Cablevision Consumer Litigation, 864 F. Supp. 2d 258 (E.D.N.Y. 2012), the Eastern District held that a breakdown in negotiations between two parties did not constitute force majeure such as to excuse one parties’ performance under another, separate contract. In the case, Cablevision customers sued because they were unable to watch News Corp programming for two weeks due to a breakdown in negotiations between Cablevision and News Corp. Cablevision argued that its nonperformance should be excused because the force majeure clause inoculated Cablevision from “any failure or interruption of program transmissions or service resulting in part or entirely from circumstances beyond Cablevision’s reasonable control.” In rejecting Cablevision’s argument, the Court noted that the force majeure clause did not “specifically address the circumstances that caused the service interruption, i.e. Cablevision and News Corp’s inability to reach a timely contract renewal.” The Court emphasized that “force majeure clauses are aimed narrowly at events that neither party could foresee or guard against in the agreement.” Obviously, a breakdown in negotiations between Cablevision and News Corp did not qualify.
- In Trump on Ocean LLC v. Ash, 2009 WL 2619233 (N.Y. Sup. Ct. 2009), aff’d as modified, 81 A.D.3d 713 (2d Dept. 2011), the Court held that a force majeure clause in a lease agreement that excused nonperformance occasioned by “unforeseen restrictive governmental laws, regulations, acts or omissions,” included the New York State Parks Department’s failure to issue a building permit. The Court noted that the events that transpired, including “the imposition of impossible to comply with standards with respect to the approved basement, the refusal of [the Parks Department] to act in its capacity as a code enforcement entity [and] its transference of its authority to Department of State,” could not have been anticipated. In accepting the defense of force majeure, the Court specifically emphasized the unreasonable and unforeseeable nature of the Parks Department effectively abdicating responsibility. It is conceivable that the Court would have reached a different result had the Parks Department merely denied the permit application as a matter of course.
- In Urban Archeology Ltd. v. 207 E. 57th Street LLC, 2009 WL 8572326 (N.Y. Sup. Ct. 2009), aff’d, 68 A.D.3d 562 (1st Dept. 2009), in the aftermath of the financial crisis of 2007-08, the Court held that financial hardship did not excuse the defendant’s nonperformance under a lease agreement where the force majeure clause specifically excluded “Landlord or Tenant’s financial hardship.” Specifically, the force majeure clause contained the catchall language: “any cause whatsoever beyond Landlord and Tenant’s reasonable control.” However, the clause also specifically excluded “Landlord or Tenant’s financial hardship.” As such, the Court found that even if the parties did not anticipate the extent or unprecedented nature of the economic downturn, the parties did consider a change in financial circumstances, and decided that this would not be a basis to shield either party from liability. Accordingly, the Court rejected the defense of force majeure.
- In Bouchard Transp. Co. Inc., v. New York Islanders Hockey Club, 40 A.D.3d 897 (2d Dept. 2007), the Court held that a league-wide lockout constituted force majeure so as to excuse the New York Islanders hockey team from performance under its lease. In the case, the force majeure clause specified “cause or causes beyond Lessor’s control which shall include, without limitation, all labor disputes.’” The Court found that the labor dispute at issue, which occurred when the Commissioner of the National Hockey League (NHL) ordered a league wide lockout, was “beyond the lessor’s control” and “fell within the definition of a labor dispute covered by the force majeure clause.”
Global health emergencies such as the COVID-19 outbreak are an unexplored area of force majeure litigation in New York and present additional policy concerns beyond, for example, labor strikes and natural disasters. Given the deadliness of the disease and the way in which it spreads, it is conceivable that courts will be reluctant to punish nonperformance occasioned by COVID-19 where a party took precautionary measures to curb the spread of the disease, but performance was not literally impossible. Alternatively, faced with a rush of nonperforming defendants claiming force majeure, courts may tighten the requirement that the specific event be listed in the force majeure clause. A party’s efforts to mitigate its risk – often a relevant factor in the court’s analysis – may take on added weight when considering whether performance was truly rendered impossible by COVID-19.
We can only hope that when courts reopen and face a likely flood of litigation stemming from COVID-19, the result will be forward-thinking precedent that not only mitigates risk among contracting parties, but also accounts for public policies aimed at slowing the spread of diseases before they become endemic.
The attorneys at Moses & Singer are closely monitoring the commercial and legal implications of the COVID-19 outbreak and are at the ready to help you navigate these uncertain times. Do not hesitate to contact the authors of this article should you seek further advice.