When does an outside event allow you to get out of a contract? New York law recognizes the “doctrine of impossibility,” which holds that a party may be excused from a contractual obligation under certain circumstances. As explained by theNew York Court of Appeals, “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.” In other words, if one party no longer has the means of carrying out the contract due to some event that the parties could not have foreseen when making their contract, the other party cannot recover forbreach of contract.
Hotel Owner Still Owes Employees Despite Foreclosure
But the doctrine of impossibility is not a “Get Out of Jail Free” card for parties unable to perform due to economic hardship or problems caused by normal fluctuations in the marketplace. Here is a recent example. This case involves a group of employees hired by a hotel management company in New York. The company owned or managed three hotels. The employees signed three-year contracts and performed work at all three hotels.
A few months into the contract, a mortgage lender foreclosed one of the hotels and removed the employees from the property. The management company subsequently fired the employees, citing the loss of the hotel. The employees then sued in Manhattan federal court, alleging breach of contract and other violations of federal and state labor laws.
With respect to the breach of contract claim, U.S. District Judge Edgardo Ramosgranted the employees’ summary judgment and awarded damages of $205,000. First, the judge noted the employment contracts, by their own terms, were “non cancellable for three years except for cause or misconduct.” Nevertheless, the employer argued the doctrine of impossibility excused performance here because the loss of the hotel was an unforeseen event. Not so, Judge Ramos said, noting New York law does not excuse performance of a contract solely based on a party's financial hardship, “even to the extent of insolvency or bankruptcy.”
Furthermore, the foreclosure was not the type of “unforeseen” event anticipated by the doctrine of impossibility. To the contrary, Judge Ramos said the management company “first received notice of the purported default” just before hiring the employees in this case. It was therefore hardly “impossible to foresee that the Lender would exercise its rights” and foreclose on the hotel. Despite the loss of the one hotel, performance was still possible because the management company owned two other properties where the employees could also work.
The employer appealed, but in an October 8 order, the U.S. Court of Appeals for the Second Circuitaffirmed Judge Ramos' decision.
Need Help With a Contract?The Second Circuit noted the employer “should have foreseen the risk of foreclosure” and included language in the employment contracts to guard against such a possibility. An important part of any contract negotiation is anticipating and minimizing potential risks to both parties. If you need help negotiating a contract from an experienced New York business attorney, contact the offices of Waldhauser & Nisar, LLP, today.