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COVID-19 Contract Performance Defenses under New York Law | Part II

April 14th, 2020 Contract Defenses, COVID-19 Considerations, COVID-19 Contract Defenses 1 Comment » By Philip J. Loree Jr.
Contract Performance Defenses

Part I of “COVID-19 Contract Performance Defenses Under New York Law” discussed how New York law can, depending on the circumstances, provide a defense to breach of contract when the breach was necessitated by the COVID-19 shelter-in-place orders or other COVID-19-related considerations.

It discussed the impossibility defense, the effect of force majeure clauses, and the UCC commercial impracticability defense (which applies to contracts for the sale of goods).

This Part II discusses two additional, closely-related doctrines that may be relevant to excusing a COVID-19-necessitated breach: (a) frustration of purpose; and (b) illegality of performance.

Contract Performance Defenses

 

Frustration of Purpose

Under the impossibility doctrine, performance must be objectively impossible, and under the doctrine of commercial impracticability, impracticable. But under frustration of purpose doctrine, “[p]erformance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event, which supervenes to cause an actual but not literal failure of consideration.” Lloyd v. Murphy, 25 Cal.2d 48, 53 (1944) (en banc).

The frustration of purpose of doctrine is supported principally by older case law. It remains, however, good law, that may, in appropriate circumstances, provide a basis for excusing performance of a contract in limited circumstances, where for example, a contract is entirely premised on the occurrence of a some entertainment, sports, professional, or other event that was cancelled as a result of COVID-19.

The doctrine evolved from the so-called “Coronation cases,” which involved the cancellation of King Edward’s VII’s Coronation Day ceremony, which was necessitated by the King’s illness. In Krell v. Henry, [1903] 2 K.B. 740 (C.A.), the Court excused a person from paying a fee for renting on Coronation Day a flat with a view of the scheduled, but ultimately cancelled, procession.

In Krell, performance was still possible—the lessee could have rented the flat for the day—but the expected value of the lessor’s performance was destroyed by a supervening, fortuitous event, resulting in an actual, if not literal, failure of consideration.

The U.S. equivalent of the Coronation cases arose out of the cancellation of the International Yacht Races scheduled for September 1914, which was necessitated by the advent of World War I. In Marks Realty Co. v. Hotel Hermitage Co., 170 A.D. 484 (2d Dep’t 1915), International Yacht Publishing Company contracted in January 1914 with a hotel company to publish the hotel’s advertisement in a book (or booklet) entitled “Souvenir and Program of International Yacht Races,” which was to be published in August 1914, shortly before the races were to be held in September 1914.

The hotel company “agreed to pay ‘upon publication and delivery of one copy’” of the book. 170 A.D. at 484 (quoting contract).

During the first-half of August 1914, approximately 2,500 copies of the books were sold or distributed at 25 cents per copy with 400-500 copies made available for sale at newsstands. Around the middle of August 1914, the yacht club sponsor announced that the race, scheduled for September, would be postponed until 1915 because of World War I.

Later in August, the publisher tendered a copy of the book to the hotel company and requested payment. The hotel company refused to pay.

Holding that the hotel company was excused from performing the contract, the Court said it was “obvious[]” that the hotel company “and the publishing company had in view the September cup racing[,]” and that the hotel company’s “advertisement was in connection with this contest.” 170 A.D. at 485.

Echoing the reasoning of Taylor v. Caldwell, 113 Eng. C.L. 826, discussed in Part I, the Court explained that “[a] condition is implied of two contestants being named for the time and place of a race; and where this feature is obvious, a failure by giving up the expected contests, abrogates the contract.” 170 A.D. at 485 (citing Lorillard v. Clyde, 142 N.Y. 456, 463 (1894).

This case, said the Court, was one “where the situation, as it turns out, has frustrated the entire design on which is grounded the promise.” 170 A.D. at 485. “An advance issue of the programs cannot fairly beheld to be what defendant to pay for[,]” and “[t]he object in mutual contemplation having failed[,]” defendant’s duty to pay was excused. 170 A.D. at 485.

As demonstrated by Krell and Marks Realty, the doctrine of frustration of purpose applies only where the circumstances causing the frustration are unanticipated. See 407 E. 61st Garage v. Savoy Corp., 23 N.Y.2d 275, 285 (1968). It does not apply “where provision could have readily been made for what actually occurred.” Frenchman Sweet v. Philco Discount, 21 A.D.2d 180, 182 (4th Dep’t 1964).

One might argue that anytime a contract is made in the contemplation of some event taking place, there is a chance the event might be cancelled, and therefore the parties should be charged with providing for that contingency in their agreement.

Because the frustration of purpose doctrine, where applicable, effectively implies a condition into the parties’ agreement that the contemplated event on which the contract is based will occur, it is not necessary to expressly condition the contract on the occurrence of the event, or otherwise provide for that contingency.

But whether or not such a condition will or will not be implied depends on whether the terms of the contract and surrounding circumstances show that such an implied condition must have been the basic assumption on which the contract was made. The basic assumptions on which the contracts in Krell and Marks Realty were clear on the facts, but that is by no means so in every case.

Raner v. Goldberg, 244 N.Y. 438 (1927), another “golden-oldie” case, provides a good example. A leased from B premises to be used as a dance hall. Both parties understood that A could not operate the premises as a dance hall without a license, A would apply for one, and that a public official would have discretion to grant or deny it.

The parties did not expressly condition the lease on the granting of the license, and even though the parties expected it would be granted, it was foreseeable that might not occur.

Citing and quoting Krell, New York’s highest court acknowledged that “[w]here expectation is so unquestioned that it becomes a definite anticipation accepted by both parties as ‘the foundation of the contract’ it may be said that there has been no choice between absolute and conditional promise; and that neither party could reasonably be expected to guard against an event which was excluded from the anticipations of both parties.” 244 N.Y. at 441-42 (quoting Krell v. Henry, [1903] 2 K.B. 740).

But the lessee’s promise was “unconditional,” said the Court, and “[w]e may not now imply a condition which the parties chose not to insert in their contract, nor hold that anticipated grant of a license constituted the foundation of the contract, when both parties knew that the grant of  a license depended on the discretion of a public officer.” 244 N.Y. at 442.

Accordingly, the Court held that A was not excused from performing the lease. See 244 N.Y. at 442-43.

Illegality of Performance

Part I discussed the doctrine of impossibility, explained that the means of performance of a contract can be destroyed by law, and that, in appropriate cases, the doctrine may provide a basis for excusing a party from performing a contract.

Supported principally by older cases, but still good law, the illegality of performance, or supervening illegality, doctrine applies in the situation where the parties enter into a valid, legal contract, but on account of an unanticipated change in law or regulation, or by unanticipated intervention by a governmental order, performance becomes illegal. See, e.g., Boer v. Garcia, 240 N.Y. 9, 15-16 (1925) (performance excused because unanticipated change in law rendered shipment by defendant of alcohol per terms and conditions of contract illegal; “law will not now hold [defendant] in damages because he did not do something which he had no right to do”); People v. Globe Mut. Life Ins. Co., 91 N.Y. 174, 178-80 (1883) (order declaring insurance company insolvent vitiated contract between agent and company, excusing receiver from post-liquidation-order performance); Heine v. Meyer, 61 N.Y. 171 (1874) (contractor excused from performance of contract, and was entitled to reasonable value of services rendered, where public official ordered work ceased because of unanticipated defect in the wall upon which contractor’s work was performed).

While today supervening illegality falls under the impossibility doctrine discussed in Part I (see discussion of Kolodin case), the illegality of performance or supervening illegality cases do not purport to condition a successful impossibility defense on the parties having included a “force majeure” or similar clause in the contract allocating the risk of supervening illegality. Presumably that is because the supervening illegality or governmental order was not reasonably foreseeable in the circumstances.

The illegality of performance or supervening illegality cases may help dispel the argument that the parties should have provided in their contract for the contingency that performance might be rendered impossible by law or decree, something that is arguably foreseeable in the context of almost any contract.

That said, whether or not an impossibility defense is successful in any given case will depend on the facts of the case, including the contract itself, the extent to which performance was rendered impossible by COVID-19-related shelter-in-place or shutdown orders, the nature of the performance to be excused, the sophistication of the parties, and other considerations.

About the Author

Philip J. Loree Jr. is a partner and founding member of Loree & Loree. He has nearly 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is a former partner of the litigation departments of the New York City firms of Rosenman & Colin LLP (now known as Katten Munchin Rosenman LLP ) and Cadwalader, Wickersham & Taft LLP.

Loree & Loree focuses its practice on solving arbitration problems for small businesses and professional practices, usually by representing them in arbitration proceedings and in arbitration-related litigation.

It represents private and government-owned-or-controlled business organizations, and persons acting in their individual or representative capacities, and often serves as co-counsel, local counsel or legal adviser to other domestic and international law firms requiring assistance or support.

Loree & Loree was recently selected by Expertise.com out of a group of 1,763 persons or firms reviewed as one of Expertise.com’s top 18 “Arbitrators & Mediators” in New York City for 2019, and now for 2020. (See here and here.)

You can contact Phil Loree Jr. at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

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