Frustration of Purpose, Impossibility, Impracticability, and Force Majeure  

Until recently, impossibility, impracticability, and acts of god were a viable justification for nonperformance of a contract.  However, COVID-19 has turned these three legal defenses into some of the most commonly referred to excuses for nonperformance within the past few months.  As the pandemic continues to reshape our society, these three provisions will become increasingly important as state and local orders continue to restrict the ability to operate businesses or organize events.  

Frustration of Purpose  

COVID-19 has frustrated the ability of many businesses in the performance of their contracts. For example, if a private school rented a building for the sole and express purpose of operating a school, could the private school rescind or terminate the lease agreement due to the mandatory COVID-19 closures? Probably so.

Even where performance remains possible, but the reason the parties entered the agreement has been frustrated by a supervening circumstance that was not anticipated such that the value of services provided by the party seeking to enforce the contract is substantially destroyed, the doctrine of commercial frustration may apply to excuse performance. It is not necessary that the performance is impossible, but that the intervening event renders the consideration valueless. Laws or other governmental acts that make performance unprofitable, more difficult or expensive do not excuse the duty to perform a contractual obligation.

In the example of the private school, the leased premises probably have no continuing value to the tenant as long as schools are required to be closed.  COVID-19 restrictions make it illegal for the school to continue operating and that was sole and the express purpose for the lease agreement. Although it may not be impossible for the school to continue paying rent to the landlord in exchange for possessing the leased premises, the consideration offered by the landlord is somewhat valueless to the tenant unless the tenant continues to use the premises for administering online learning. Issues like this are likely to fill the courts in the coming months.

Impossibility

Generally, “impossibility” acts as a legal excuse for the nonperformance of duties in an agreement.  Unless the parties expressly agree that impossibility will not excuse performance, a party’s nonperformance may be excused by an irresistible or superhuman cause.  Impossibility can occur in a variety of situations such as the death of a party, destruction of a property during escrow, prevention of performance due to weather such as a hurricane, and when the government, during the course of performance, passes a law making the contemplated performance illegal.  By way of example, courts have held that when a contract calls for unique personal services of a particular party and the party dies, the contract is rendered impossible due to the death of that party as his or her particular services cannot be performed by the decedent’s estate. Under COVID-19. Non-essential businesses will likely be prevented from fulfilling contracts because the government restrictions have closed the business making it impossible to perform.  

In practice, impossibility provisions can vary in application as the defense is incredibly fact sensitive.  If you believe you may be able to avail yourself to an impossibility defense, you should contact an attorney to discuss the potential ramifications prior to making any statements to the opposing party.  Improperly asserting impossibility for nonperformance could subject the party to additional liability under their agreements.

Impracticability

Similar to impossibility, the doctrine of impracticability provides individuals with an excuse for nonperformance when the performance of said contractual duty becomes unfeasible, difficult, or unduly expensive.  Impracticability is a form of legal impossibility.  However, it focuses on the impractical nature of the performance because of excessive or unreasonable expenses associated with performance.  The classic case dealing with impracticability is memorialized in Mineral Park Land Co. v. Howard, where a contractor was excused from performance relating to gravel removal because a portion of the gravel was under water, unavailable, and could not be obtained in a practical and reasonable way. 

By way of further example, impracticability can be applicable in the instant pandemic when holding an event or obtaining materials for a project would be unreasonably costly due to business closures stemming from Governor Newsom’s restrictive shelter in place order which resulted in the immediate closure of numerous businesses throughout California.  Similar to the doctrine of impossibility, legal counsel should be sought before asserting impracticability as an excuse for nonperformance. 

Force Majeure

When individuals think of acts of god, they recall extraordinary events such as the flood which involved catastrophic loss of life and supernatural demonstrations of power.  However, force majeure clauses contemplate acts of god that do not require equivalent acts to the flood in order to excuse nonperformance.  Courts will apply force majeure clauses when the particular circumstances surrounding the agreement insuperably interfere with the performance of a contract when no diligent exercise of care by either party could have prevented the interference.

For example, force majeure clauses became common when the United States entered into the Second World War.  In Pacific Vegetable v. C.S.T., LTD, the California Supreme Court applied the doctrine of force majeure to excuse the failure to deliver cargo, which was being moved from Fiji to San Diego, because the seller was prevented from obtaining the required export permits when the United States entered into the World War II.

In practice, these provisions in contracts are typically drafted with language that is similar to the following:

“This Agreement shall automatically terminate and neither Party shall be liable for any costs or damages due to delay or nonperformance under this Agreement when such nonperformance was caused, either directly or indirectly, by events beyond the Party’s control including, without limitation, Acts of God, earthquakes, floods, fire, wars, civil or military disturbances, acts of terrorism, sabotage, strikes, epidemics, pandemics, declared states of emergency which render the performance impractical, riots, power failures, and any such other circumstance which is beyond the Party’s reasonable control as may render the performance of a Party’s obligations under this agreement impossible or impractical.”

Ultimately, force majeure is another form of impossibility and the contract terms should be carefully assessed to determine the potential applicability to a particular situation.  If the contract contains a force majeure provision, you will want to ensure that you assess the language to determine if it specifically includes pandemics under the provision. 

Conclusion

In summary, these three forms of contract defenses may excuse performance of a contract under COVID-19. If you have any questions and wish to obtain legal advice as it applies to your specific situation, please do not hesitate to contact Tyler Law LLP.