COVID-19 And Contract Enforcement – Coronavirus (COVID-19)

Bizar Male

There has been much discussion of the legal issues raised by the
pandemic when contractual obligations can no longer be met. This
memorandum notes some of those issues.

Waiver

Contracts are voluntary arrangements. Likewise, enforcement of a
contract is a voluntary act. One may decide not to insist on strict
compliance. This can raise questions as to whether rights have been
waived, and, if so, to what extent. Contract rights can be waived
“fully or only partially,” depending on the
circumstances.1

A decision to forbear from the enforcement of a contract right
can be a valuable concession that serves as the basis of a new
agreement, but ideally the new agreement will be drafted with care.
Otherwise the decision can easily turn into a dispute. For waiver
of contract rights is an issue of intent,2 and questions
of intent are often difficult prove. “[T]he intent to waive is
usually a question of fact,”3 therefore any failure
to make one’s intention explicit and unambiguous can lead to
the worst sort of dispute: a protracted one.

Contract provisions designed to avoid disputes over potential
waivers and modifications of the contract may fail to serve their
purpose. For example, many written contracts contain a provision
stating that modifications of the contract are ineffective unless
the modifications are made in writing. New York has a statute
requiring such provisions be respected.4 But New
York’s highest court has held that two circumstances can make
this statute’s protection against oral modifications
inapplicable. The first is when “the oral agreement to modify
has in fact been acted upon to completion”; the second is when
“there is partial performance” that is
“unequivocally referable to the oral
modification.”5 Furthermore, even if neither of
those two exceptions to the statute apply, a party may still be
barred from enforcing the original, written contract if a court
finds that enforcing the unmodified contract would be unfair:
“Once a party to a written agreement has induced another’s
significant and substantial reliance upon an oral modification, the
first party may be estopped from invoking the statute to bar proof
of that oral modification.”6

Although events are unfolding quickly, parties to commercial
contracts are urged to take the time to make their intentions in
modifying their written contracts as clear as possible.

The Defense of Impossibility

Under New York common law, sometimes a party is relieved from
its contractual obligations because performance has become
impossible. “Generally, however, the excuse of impossibility
of performance is limited to the destruction of the means of
performance by an act of God, Vis major, or by
law.”7 “[T]he impossibility must be produced
by an unanticipated event that could not have been foreseen or
guarded against in the contract.”8 In the specific
case of contracts for the sale of goods, New York’s Uniform
Commercial Code codifies this rule. The statute refers to
circumstances where “performance as agreed has been made
impracticable by the occurrence of a contingency the non-occurrence
of which was a basic assumption on which the contract was made or
by compliance in good faith with any applicable foreign or domestic
governmental regulation or order whether or not it later proves to
be invalid.”9

More often than not, impossibility defenses fail. For example,
financial hardship, taken alone, is generally not
enough.10 But a government directive interfering with
the contract can support an impossibility defense. The
impossibility defense can succeed even if the government directive
is informal. For example, in a case decided by a federal appeals
court applying New York law, a U.S. business had a contract with a
Swedish business relating to the supply of radio parts to Iran and
other countries. The U.S. business then made an agreement with the
U.S. government that it would cease supplying the parts to Iran.
When the Swedish business sued it for breaching their contract, the
court held that the U.S. business’s “compli[ance] in good
faith with the government’s informal requirements”
established an impossibility defense.11

Today, emergency orders and related government directives are
issuing at a rapid pace. In New York City, restaurants,
“entertainment venues,” and “commercial gyms”
have been directed to cease their principal
operations.12 Throughout New York State, most businesses
have been directed to ensure that at least 50% of their workforce
operates remotely.13 More recently, the governor of New
York State has tweeted that this figure will be increased to
75%14 and that indoor portions of retail shopping malls
throughout New York and other nearby states will be ordered to
close.15 These government directives may support an
impossibility defense to certain contract claims.

New York’s common law of contracts and the Uniform
Commercial Code provide the applicable rules absent any agreement
to the contrary. Many contracts seek to expand the law by a
force majeure clause. These clauses must, however, be read
carefully. “Ordinarily, only if the force majeure
clause specifically includes the event that actually prevents a
party’s performance will that party be
excused.”16

Insurance Policies

An insurance policy is a contract. Many businesses will
naturally look to recover under their policies for losses caused by
recent events. This can easily lead to disputes over the
interpretation of the policy.

For example, some policies cover losses of income that are
caused by “physical damage” to the insured’s
property. In such instances, the question naturally arises whether
the presence of a virus on the property – or the potential for
contamination – constitutes “physical damage.” For
example, in a 2005 case, it was held that a trial was necessary to
determine whether an e-coli contamination on the insured’s
property constituted “physical damage” within the meaning
of the policy.17 The applicability of various exclusions
written into particular contracts must also be closely examined. No
doubt, the meaning of many insurance policies will be litigated in
the time to come.

Businesses must review their insurance policies closely -
including any notice provisions. Timely notice to the insurer, in
appropriate form, should be one of the first concerns.

Footnotes

1. Fundamental Portfolio Advisors, Inc.
v. Tocqueville Asset Mgmt., L.P., 850 N.E.2d 653, 659 (N.Y. 2006)
(holding that a trial was necessary to determine whether a
contracting party “fully or only partially waived its
rights”).

2. Beth Israel Med. Ctr. v. Horizon Blue
Cross & Blue Shield of N.J., Inc., 448 F.3d 573, 585 (2d Cir.
2006) (“[W]aiver of a contract right must be proved to be
intentional . and mere silence, oversight or thoughtlessness in
failing to object to a breach of the contract will not support a
finding of waiver.” (internal quotation marks omitted)).

3. Jefpaul Garage Corp. v. Presbyterian
Hosp., 462 N.E.2d 1176, 1178-1179 (N.Y. 1984).

4. N.Y. Gen. Oblig. Law § 15-301(1)
(“A written agreement or other written instrument which
contains a provision to the effect that it cannot be changed
orally, cannot be changed by an executory agreement unless such
executory agreement is in writing and signed by the party against
whom enforcement of the change is sought or by his
agent.”).

5. Rose v. Spa Realty Assocs., 366 N.E.2d
1279, 1283 (N.Y. 1977).

6. Id.

7. 407 East 61st Garage, Inc. v. Savory
Fifth Ave., Corp., 244 N.E.2d 37, 41 (N.Y. 1968).

8. Kel Kim Corp. v. Central Markets,
Inc., 519 N.E.2d 295, 296 (N.Y. 1987).

9. N.Y. U.C.C. § 2-615.

10. Axginc Corp. v. Plaza Automall, Ltd.,
No. 14-CV-4648, 2017 WL 11504930, at *8 (E.D.N.Y. Feb. 21, 2017)
(“Financial difficult or economic hardship of the promisor
does not establish impossibility sufficient to excuse performance
of a contractual obligation” (citation, internal quotation
marks and alteration marks omitted)).

11. Harriscom Svenska, AB v. Harris
Corp., 3 F.3d 576, 580 (2d Cir. 1993).

12 .Mayor’s Emergency Executive Order
No. 100 (Mar. 16, 2020), available at https://www1.nyc.gov/assets/home/downloads/pdf/executive-orders/2020/eeo-100.pdf.

13. Governor’s Executive Order No.
202.6 (Mar, 18, 2020), available at https://www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/EO202.6.pdf.

14. See https://twitter.com/NYGovCuomo/status/1240651109108199424.

15. See https://twitter.com/NYGovCuomo/status/1240350449041125376.

16. Kel Kim Corp., 519 N.E.2d at
296.

17. Motorists Mut. Ins. Co. v. Hardinger,
131 Fed. App’x 823, 826-827 (2d Cir. 2005).

Originally published March 20, 2020

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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