New Meaning of Defenses: Impossibility of Performance
Richard Roth, Esq –
22nd April 2020
We recently wrote a blog on how the force majeure clause has become so important in defending contracts in this COVID-19 era. So, too, is the impossibility defense.
That is, an alternative to force majeure clauses that excuse performance is for parties to argue impossibility of performance. Generally, the doctrine of impossibility of performance is a common law defense that has regularly been applied very narrowly.[1] The doctrine is used as a defense “only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible.”[2] Within the scope of Coronavirus and intervening government regulation, the doctrine of impossibility of performance can be used when a party cannot perform under the contract by “intervening governmental activities, but only if those activities are unforeseeable.”[3] Unforeseeable government activities do not include the passage of new legislation that was being conceived of at or near the time of the non-performance.[4]
In Urban Technology Ltd. v. 207 E. 57th Street LLC, the Court held that impossibility of performance “occasioned by financial hardship does not excuse performance of a contract.”[5] The Court reasoned that since the contract in that case was a lease, economic downturn could have been foreseen or guarded against in the terms of the lease.[6]
Yet, in Metpath Inc.v. Birmingham Fire Ins. Co. of Pennsylvania, the Court held that unforeseen government action, where President Reagan unilaterally stopped a strike of workers, which in turn caused non-performance on an insurance premium, to be “unforeseen.”[7] The Court reasoned that there was absolutely no way for the parties to have “reasonable contemplated” that the government would end the worker strike.[8]
For parties in post-Coronavirus litigation that do not have force majeure clauses in their contracts, but instead rely on the impossibility of performance doctrine, the outcome of their cases will largely hinge on whether or not the courts see their impossibility as one that stemmed from government action, or from economic disparity. It seems clear from the caselaw that courts are willing to allow parties to use impossibility of performance when unforeseen government action occurs, but less open to allowing the doctrine when economic downturn occurs. In the time of Coronavirus, these two divergent scenarios are actually very closely linked. The economic downturn of the US economy could be connected back to the government mandating that only essential store-front businesses remain in operation.
However, there will be plenty of parties that will argue that the government policies and economic downturn are two completely separate events, in an attempt to by-pass the impossibility of performance doctrine and find defendants liable for non-performance. These parties will state that although the government intervention could be responsible for some of the economic downturn, the true impetus for the staggering economy is the simple eb and flow of the market. Many will argue that this is a foreseeable phenomenon, and should have been included in the contract if defendants wanted it covered. It will be interesting to see how the Courts handle the doctrine of impossibility of performance, given the intertwined nature of government intervention and the economy during the Coronavirus pandemic.
(Assisted by Samuel Hines)
[1] Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902 (N.Y. 1987).
[2] Kolodin v. Valenti, 115 A.D.3d 197, 200 (1st Dept 2014).
[3] RW Holdings, LLC v. Mayer, 131 A.D. 3d 1228, 1230 (2d Dept. 2015).
[4] See Id.
[5] Urban Technology Ltd. v. 207 E. 57th Street LLC, 68 A.D.3d 562 (1st Dept. 2009).
[6] Id.; see also Stasyszyn v. Sutton East Associates, 161 A.D.2d 269, 271 (1st Dept. 1990) (“[T]he law is well-established that economic inability to perform contractual obligations, even to the extent of insolvency or bankruptcy, is simply not a valid basis for excusing compliance”).
[7] Metpath Inc.v. Birmingham Fire Ins. Co. of Pennsylvania, 86 A.D.2d 407, 412 (1st Dept. 1982).
[8] Id.
