COVID-19 AND THE CONTRACTUAL DEFENSES OF IMPOSSIBILITY/IMPRACTICABILITY AND FRUSTRATION OF PURPOSE
April 6, 2020
By: Eric R. Tubbs
As discussed in our previous post Force Majeure Clauses and Contractual Nonperformance as a Result of COVID-19, businesses that are or may be affected by the COVID-19 pandemic should consider evaluating their contracts for force majeure clauses, which may relieve them from liability for non-performance or delayed performance. Even in the absence of a contractual force majeure provision, a non-performing party may be excused from performance or a delay in performance based on the common law defenses of “impossibility/impracticability” or “frustration of purpose”.
The Defenses of Contractual Impossibility/Impracticability and Frustration of Purpose
These defenses are raised to excuse a non-performing party’s contractual obligations where its performance becomes either impossible (it simply cannot perform its obligations) or impractical (extremely difficult or unreasonably expensive) due to a supervening event (an event that occurs after the contract is made). The supervening event must be outside of the non-performing party’s control, and the non-occurrence of such event must be a basic assumption on which the contract was made.
Frustration of Purpose
The defense of frustration of purpose is slightly different. In this instance a supervening event must have destroyed or frustrated a party's main purpose for entering into the transaction. Like the defenses of impossibility and impracticability, a party must show that the supervening event was outside of the party’s control and that the occurrence or non-occurrence of the event was a basic assumption on which the contract was made.
Does the COVID-19 Pandemic Enable a Non-Performing Party to Assert a Defense of Impossibility/Impracticability or Frustration of Purpose?
These defenses will largely depend on the language of the pertinent agreement and the specific facts and circumstances of the transaction. However, it is likely not enough that COVID-19 occurred, but rather it must have led to an event outside of the non-performing party’s control that made such party’s performance impossible or impracticable, or frustrated that party’s purpose for entering into the contract. Further, like the defense of force majeure, even if the non-performing party can show that the effects of COVID-19 made its performance materially more difficult or costly, many courts tend to interpret these doctrines narrowly, and require the non-performing party to show that the effects of the supervening event were beyond the normal range of anticipated circumstances. For example, a change in economic conditions alone generally does not constitute an unforeseeable event, and therefore a court may be reluctant to excuse a non-performing party under these doctrines if its only defense is that its economic circumstances have declined or its costs have increased as a result of the COVID-19 pandemic.
Potential Examples of when the COVID-19 Pandemic Could Give Rise to a Defense of Impossibility/Impracticability or Frustration of Purpose
Potential examples of when the COVID-19 pandemic could give rise to the defenses of impossibility/impracticability or frustration of purpose may include:
- A person who is necessary to the performance of the contract becomes incapacitated, ill, quarantined, or dies because of COVID-19.
- The destruction of an irreplaceable or perishable good as a result of the inability to transport or store the goods properly, or the contamination of the goods by COVID-19 results in the goods becoming unusable or inconsumable.
- The contract requires performance in a location where there is a government-imposed shelter-in-place order.
- A party cannot secure raw materials without extreme and unreasonable expense due to effects of the COVID-19 pandemic causing shutdowns of commercial facilities.
This discussion is intended as general guidance and is not intended as legal advice to be relied upon or applied to any particular factual circumstances. If you have any questions or need assistance regarding force majeure provisions in your contracts or any other contractual or legal doctrines that could excuse a party’s nonperformance due to the COVID-19 pandemic, please contact your Nyemaster Goode attorney.