Client Alert 24 Mar. 2020

U.S. Insight (Coronavirus/ COVID-19): Force Majeure under New York Law

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Will New York courts consider the COVID-19 pandemic, or the governmental actions taken in response, equivalent to a force majeure event for purposes of nonperformance or termination of a contract?

Force Majeure Under New York Law

  • In common law jurisdictions such as New York, “force majeure” refers to a specific clause which the parties may include in their contract.
  • The concept of force majeure excuses a party’s contractual performance when under certain circumstances it is unable to perform based on an event beyond its control.
  • If the alleged event is covered by the force majeure clause, New York courts may excuse the party’s performance, provided that the party also attempted to mitigate any damages and complied with the remainder of the contract’s provisions prior to the force majeure event.
  • New York courts construe force majeure clauses narrowly, according to the wording and requirements of each clause.
    • Only events specifically listed in the force majeure clause will excuse a party’s performance. A New York court would likely not consider an event which is not enumerated in the clause to fall within its scope.
    • Force majeure clauses may also contain a “catch-all” provision. This provision can be broad, such as “or other similar or dissimilar event or circumstances.” The catch-all could also be narrow, such as “or other similar causes beyond the control of such party.” Courts will construe the clause according to the principle of ejusdem generis: only events of the same nature as those specifically enumerated in the clause will be deemed to be included in its scope.
    • Mere financial hardship is not sufficient to invoke a force majeure clause.
    • Force majeure cannot be invoked if (1) the event was foreseeable at the time of signing; (2) the fact that the event would not occur was a “basic assumption … on which the contract was made;” or (3) the party did not reasonably attempt to exhaust alternatives to nonperformance.
    • A party must also demonstrate a causal nexus between the alleged force majeure event and its failure to meet its contractual obligations.
    • Other contractual provisions can also affect the scope and interpretation of the force majeure clause, such as clauses which transfer risk from the shipper to the buyer.

If force majeure cannot be invoked, what common law concepts may be implicated in this situation?

  • If the contract does not contain a force majeure clause, a party can attempt to assert the defense of impossibility or frustration of purpose.
  • New York courts tend to apply these doctrines narrowly. This conservative approach conforms with the idea that parties to a contract have chosen to allocate risks among themselves, and that contractual obligations should be enforced other than in the most extreme of circumstances.
  • Impossibility
    • A party may be able to claim impossibility, which “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.”
    • The requirements for an impossibility claim are (1) the occurrence of an unforeseeable event that (2) the parties assumed would not occur when making the agreement which (3) renders contractual performance impossible.
  • Frustration of Purpose
    • Frustration of purpose occurs when performance is possible, but when it would no longer result in the affected party receiving the benefit that had induced it to make the agreement.
    • The relevant analysis is not whether the party is unable to perform, but whether the event at issue has rendered the contract “valueless” to the affected party or otherwise obviated the sole reason for entering into the agreement.
    • The requirements for a frustration of purpose claim are (1) an unforeseeable event that substantially frustrates the purpose of the contract which (2) the parties had assumed would not occur when drafting or signing the contract; and (3) which was not the fault of the party asserting the defense to nonperformance.
    • The bar for asserting this defense is high: the fact that the transaction has become unprofitable, or that a party can no longer take advantage of the contract as expected, may not be sufficient.

Attorney advertising. The material contained in this Client Alert is only a general review of the subjects covered and does not constitute legal advice. No legal or business decision should be based on its contents.