Client Alert: Impossibility, Frustration of Purpose, and Impracticability: Doctrines that may excuse contractual performance during the COVID-19 pandemic
In a previous Alert, we discussed how the operation of a force majeure clause in a contract may excuse a party’s performance in whole or in part. But what if a contract does not contain a force majeure clause? Other legal doctrines may still come into play to excuse performance under the circumstances created by the current COVID-19 pandemic.
Impossibility of Performance: The doctrine of impossibility can excuse a party’s contract performance when an unforeseen event makes performance objectively impossible. As with force majeure, the doctrine of impossibility is applied narrowly. Notably, New York law is more restrictive than the law of many other states because it requires that performance be objectively impossible. Proving objective impossibility due to the COVID-19 pandemic will likely be easiest for “non-essential” New York businesses that have been required by Gov. Cuomo’s Executive Order 202.8 to reduce their in-person workforces by 100%. But whereas proof of objective impossibility may be relatively easy for a manufacturer that has been forced to close down production due to that workplace restriction, it may be a far more difficult burden of proof for a service-oriented business whose employees are able to work remotely from their homes. Other factors will also affect the analysis, including the temporary nature of current workplace restrictions, a party’s ability or inability to complete the performance of its obligations through alternative means, whether a party’s performance is made wholly or only partially impossible, and whether performance is rendered permanently or only temporarily impossible. Bearing in mind that the doctrine of impossibility is traditionally applied in a narrow fashion, businesses that wish to take advantage of it to excuse their contractual performance will need to marshal all relevant facts in order to make a persuasive case.
Frustration of Purpose: This is another common law doctrine that may excuse performance, but only in a narrow set of circumstances. It applies when a change in circumstances after a contract was entered into makes one party’s performance worthless to the other, frustrating his purpose in making the contract. To excuse non-performance, the frustrated purpose must be so fundamental and essential to the contract that, without it, the parties would have never entered into their transaction in the first place. The objective intent of the parties, as exhibited by the language of the contract itself, is typically the key to determining whether the frustration goes to the essential purpose of the contract. The event causing the frustration must also have been unforeseeable, as the non-occurrence of the frustrating event must have been a basic assumption on which the contract was made. Generally, a contract will not be deemed to have been frustrated to the point of invoking the doctrine if the event merely renders the contract more expensive or difficult to perform, if an alternative method of performance is available, or if the event is the fault of one of the contracting parties. Although the burden of proof for invoking the doctrine of frustration is high, the unprecedented nature of the COVID-19 pandemic and the government-mandated restrictions imposed on businesses as a result of it may present circumstances that support its application in specific cases.
Impracticability: Sale of Goods Under The Uniform Commercial Code: Section 2-615 of the Uniform Commercial Code (“UCC”) provides that a seller of goods may be able to excuse his inability to deliver all or some of the goods where performance has been made “impracticable.” This section of the UCC is essentially a codification of the doctrine of impossibility. It provides, in relevant part, that a seller is not in breach of his obligations under a contract for sale of goods if performance “has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.” Section 2-615’s notable reference to performance being hindered by good faith compliance with “any applicable foreign or domestic governmental regulation or order” may have special relevance in the context of the COVID-19 pandemic, which we are seeing cause shortages and supply-chain interruptions in a host of different industries. Note that Section 2-615(c) requires that a seller whose performance has been made impracticable so notify the buyer promptly (“seasonably”) that there will be delay or non-delivery of the goods and, where partial performance is possible, allocate production in a way that is fair and reasonable.
The COVID-19 pandemic continues to disrupt commerce in innumerable ways, presenting many novel issues for businesses in New York and across the U.S. The attorneys at Bleakley Platt continue to monitor developments in the law as they occur, and welcome the opportunity to counsel our clients as they confront the challenges of doing business during this period of unprecedented uncertainty.