Pacta sunt servanda, i.e., agreements must be kept. This applies in both good economies and bad.
Companies considering a modification of their business operations to offset lower revenue must be mindful of existing commercial contracts. Implicit in almost every New York agreement is a covenant of good faith and fair dealing in the course of performance. Output and requirements contracts are an exception, however. With an output contract, the parties agree that the seller will sell all the goods or services it may produce to a buyer in exchange for the buyer’s agreement to purchase them. A requirements contract obligates the buyer to purchase what it needs or requires from a seller in exchange for the seller’s promise to supply the buyer.
Where an agreement is neither an output nor a requirements contract, then both parties have continuing obligations throughout the term. The defenses of “impossibility” and “frustration of purpose” excuse performance in only the rarest of circumstances. What may seem like an obvious obstacle may not meet the threshold. A company that fails to understand the nature of its agreement or is unfamiliar with the applicable case law is exposed to significant monetary penalties. As a leading New York case has made clear, this counts for real estate development and hotel contracts as well.
Continue Reading Repurposing Real Estate Development to Counter Weakened Demand: Know the Risks Before Terminating Contracts