The Coronavirus (COVID-19) pandemic is disrupting business operations globally in unprecedented fashion. Diligent companies will assess both their own and the other parties’ obligations to perform under contracts. Previously, we explored “force majeure” clauses which may excuse performance. But what about when there is no applicable force majeure provision? In this article, we explore the related doctrines of impracticability, frustration of purpose and impossibility as potential alternatives.
Impossibility, Impracticability and Frustration
Most US states recognize common law doctrines such as impossibility, which may be invoked to excuse contractual performance under certain circumstances. In many of these states, impossibility typically requires that there was literally no possible way for the party to perform its duties. For example, a contractor would not be in breach for failing to perform work on a building destroyed by a fire through no fault of his own. However, a contractor who finds the soil is far more rocky than he thought, thus doubling the cost to him, is probably not excused from performance.
Contract law has long recognized and accommodated situations where performance is rendered impracticable. Section 261 of the Restatement (Second) of Contracts explains:
Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.
For performance to be “impracticable”, the event must be unforeseeable and not caused by the party expected to perform. Yet, a situation where performance is unprofitable or inconvenient is usually not enough. Applying the impracticability doctrine to the coronavirus pandemic means prevailing on such a claim will depend upon the facts and circumstances of the contract. Impracticability requires a showing that performance can only be accomplished with “excessive and unreasonable cost”. In most courts, impracticability is also a high bar.
Texas, New York and California
Texas law recognizes the doctrine of impossibility of performance. Texas courts excuse a party’s performance where performance is rendered impossible “without his fault by the occurrent of an event.” Texas law dictates that events that were foreseeable at the time of contract formation, and part of the mutual intent of the parties, will not excuse non-performance. Texas courts have further interpreted impossibility to require more than mere difficulty, hardship or expense — the party claiming impossibility will have to demonstrate “reasonable efforts to surmount the obstacle to performance”.
New York law — like Texas’ — recognizes the doctrine of impossibility of performance. New York courts have limited impossibility to those cases where performance is “objectively” impossible due to the “destruction of the means of performance” by an act of God, force majeure event or the subsequent passage of law rendering performance illegal. The courts also accept the defense of impossibility when there has been a change in circumstances so fundamental that it would be unjust or contrary to public policy to hold the parties to their original agreement. This could include the death or incapacity of a person necessary to performance or the destruction of an irreplaceable good or component.
California has expanded its common law impossibility doctrine to include impracticability. As such, California courts may excuse performance where a party can demonstrate that performance may be so difficult and expensive that it becomes impracticable, though technically possible. Notably, this does not just mean that its harder or more expensive than originally contemplated. Instead, impracticability requires a showing that performance can only be accomplished with “excessive and unreasonable” cost.
Both New York and California recognize a defense based on “frustration of purpose,” which applies when “the frustrated purpose is so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.” Just as with impossibility, this requires that the frustration resulted from an unforeseeable change in circumstances which was beyond either parties’ control. Frustration must also be mutual — the contract just have been rendered pointless for both parties. Texas courts recognize “frustration of purpose” in name alone; in Texas courts, the doctrine is functionally equivalent to the impossibility doctrine.
The Uniform Commercial Code
Article 2 of the Uniform Commercial Code (UCC) may also excuse performance where performance is rendered impracticable by either (1) the occurrence of an event “the nonoccurrence of which was a basic assumption on which the contract was made” or (2) good faith compliance with foreign or domestic government regulation.See, e.g., N.Y. U.C.C. § 2-615(a); Cal. Com. Code § 2615; Tex. Bus. & Com. Code § 2.615. Here, impracticability is an easier standard to satisfy than impossibility, allowing performance to be excused where it is theoretically possible but prohibitively expensive. Article 2 only governs contracts for the sale of goods. Thus, unless state law otherwise recognizes impracticability as a defense at common law (such as in California), performance of contracts for services or real property will not be excused based on commercial impracticability.
In signatory nations, the United Nations Convention on Contracts for the International Sale of Goods (CISG) governs contracts for the sale of commercial goods between parties in different countries (that is, unless the parties have expressly waived its applicability). Article 79 of the CISG may excuse nonperformance that results from an unforeseeable impediment beyond a party’s control that it could not have overcome.