The COVID-19 crisis and the measures implemented in response, including states of emergency, social distancing, and mandatory closures, have created extreme challenges for businesses, especially those that are unable to fulfill their contractual obligations due to shutdowns, layoffs, and delays. Whether your own business can’t perform or you’re frustrated by another party’s inability to perform, the degree of relief on the horizon depends on the force majeure language in your contract.
By either excusing or deferring performance, force majeure clauses are designed to protect businesses or individuals when they are unable to perform their contractual obligations due to events beyond their control. The clause is typically triggered only if an event occurs beyond the parties’ control, such as a fire, terrorist attack, war, an “act of God,” and even governmental action that prevents the parties from being able to perform.
Under New York State Law, to be enforceable, a force majeure clause must specifically state what type of event triggers the protection. If the specific event is not listed in the clause, or there is no broad catch-all, the force majeure clause will not excuse or delay performance under the agreement.
To be covered during the COVID-19 pandemic, the force majeure clause must include language about illness, plague, outbreak, and the like, or acts of government (which would apply to a non-essential business’s inability to perform due to Governor Cuomo’s Executive Orders), and/or a catch-all provision, such as “a cause beyond the control of such party for any reason.”
Because the enforceability and applicability of force majeure clauses are so dependent on the language, such clauses may help a business during this time – or be useless depending on how the clause was drafted and what was expected by the parties at the time of negotiation. The shutdown brought about by the coronavirus pandemic almost seems like fiction, and was thus likely not considered by most parties at the time they negotiated contracts calling for performance during this unprecedented time.
However, even in the absence of an applicable force majeure clause, or if the clause does not list a qualifying event, the non-performing party may still be protected under New York law. New York State courts have found that if performance is impossible in certain situations, the parties may not have to perform their obligations under the contract. The Courts have also held that one party cannot keep payment received in exchange for something it is unable to perform for the second party. For example, a resort whose kitchen burned down was required to return the down payment to a patron who had reserved the resort’s kitchen facilities for an event. The Court held that the resort would be unjustly enriched if it could keep the deposit while the patron was unable to use the kitchen facilities as agreed.[1]
If you have a contract that you or the other party is unable to perform and you have questions about what to do next, please reach out to us. We’ll review your agreement and let you know your options so you can move forward in the most productive way possible.
[1] Leisure Time Travel, Inc. v. Villa Roma Resort & Conference Ctr., Inc., 55 Misc. 3d 780, 782 (N.Y. Sup. Ct. 2017)