Business Interruption and Contractual Nonperformance: Common Law Principles of Frustration, Impracticability and Impossibility
As countries around the world respond to the arising threat posed by the coronavirus (COVID-19) pandemic, businesses are finding their operations interrupted due to a number of reasons, such as personnel shortages, supply chain disruptions or governmental orders (e.g., closing borders and shelter-in-place orders). Businesses faced with these interruptions are contemplating whether they can continue to meet their obligations under their contracts and what to do if they cannot.
For businesses facing a situation where its performance under a contract may be delayed or it may not be able to perform at all, there are a few potential avenues that can provide a defense for its delay in performance or nonperformance. Discussed below are defenses based on common law principles of “frustration,” “impracticability” and “impossibility.” You can also read our posts on force majeure clauses and defenses based on Article 2 of the Uniform Commercial Code (UCC).
Principles of “Frustration,” “Impracticability” and “Impossibility”
If a contract does not include a force majeure clause (and sometimes even if it does), the common law principles of frustration, impracticability and impossibility might apply to excuse a delay in performance or nonperformance. It is especially important to look at these in circumstances where UCC Article 2 does not apply, such as a contract for the performance of services.
Generally, parties to a contract are obligated to perform as mutually agreed upon. However, the principle of frustration excuses nonperformance when an occurrence which is outside of the control of the parties and could not have been reasonably foreseen at the time of contracting operates to destroy the very purpose for the contract. An example of when the principle of frustration might apply is contracting to rent a concert hall for a concert and the hall burns down prior to the concert. In this case, the reason for the contract, which was to rent the concert hall, has been destroyed. Whether the COVID-19 pandemic could allow for application of the principle of “frustration” to excuse performance would depend on the contract itself and the purpose of the contract, and may not be applicable to all contracts.
These two principles are related to one another. They generally apply when a party’s performance of its contract obligations has either been made impracticable or impossible by the occurrence of an event outside of the control of the parties and which could not have been reasonably foreseen at the time of contracting. The difference is the extent to which the occurrence disrupts the performance. The principle of “impracticability” can excuse performance where performance is not practicable for the performing party, whereas the principle of “impossibility” requires performance be absolutely not possible by the party or a third party in a similar position.
The laws of the state governing the contract may impact the principles of “frustration,” “impracticability” and “impossibility.” For instance, some jurisdictions refuse to apply these principles if the contract contains a force majeure clause. Similarly, some courts strictly apply the principle of impossibility, holding that performance must be absolutely impossible, while other courts are willing to consider market conditions and economic costs to determine whether performance is possible.
COVID-19 and Its Impacts
Whether nonperformance of contracts due to COVID-19 could be excused under the common law principles of “frustration,” “impracticability” and “impossibility” may depend on the type of contract, reason for contracting if the contract contains any force majeure clauses and the state law that governs the contract. The determination of whether nonperformance can be excused will be fact specific and the degree to which the business’ ability to perform was impacted, actions taken by the business to maintain its ability to perform and the ability of competitors to perform may all be considered in that determination. Additionally, as litigation arising out of the pandemic is decided by the courts and legislation is passed by state legislatures surrounding COVID-19 relief, more guidance may become available.
With increasing restrictions on business and populations as countries wrestle with the pandemic, it is uncertain what the impact of COVID-19 will ultimately be. If you believe you or your business may be impacted by the disruptions caused by the pandemic such that performance may be delayed or not possible, you should carefully review your contracts paying attention to any provisions related to performance and suspension of performance, force majeure and termination.
Author: Mayukh Sircar
The blog content should not be construed as legal advice.