In continuation of the firm’s earlier post discussing when a business can excuse or delay performance under certain contracts that cannot be honored due to the COVID-19 crisis, it is important for individuals and business leaders alike to ask whether the common law excuse doctrines of illegality, impossibility, impracticability, and/or frustration of purpose apply. Generally, for these excuse doctrines to be applicable, an unforeseeable event must occur after the time of contracting. These doctrines do not operate independently. Several of the doctrines can be applicable to a given situation.
Because parties are generally free to contact around common law doctrines via specific contract language, the first step an individual or business leaders should take is to engage an attorney to carefully review relevant contracts for: (a) any references to the excuse doctrines, and (b) to any language precluding the application of such doctrines.
The concept of illegality in contract law provides that if performance under a contract would require an illegal act, that a court will deem said contract to be void and unenforceable, thereby excusing performance. It also matters not whether the contract was illegal at the time of contracting, or whether subsequent to execution it is made illegal by act of the controlling government authorit(ies). The latter of these two situations is potentially implicated by the policy responses taken by governments to combat the spread of the COVID-19 pandemic.
For example, think of all the service providers involved in executing a large wedding. The legal prohibition of such non-essential services may void the service contracts for illegality. These contracts may also be voided as against public policy where, as is now the case, there may not be laws criminalizing certain activities, but government agencies (e.g., the CDC) have provided official guidance strongly encouraging adherence to the same for public health reasons.
Importantly, those analyzing a contract for the potential applicability of the illegality doctrine will need to determine which local, state, and/or federal laws are applicable. Contracts may contain express choice of law provisions. In the event they do not, which state’s law is applicable can become very complicated. An act may be illegal in State X but legal in State Y. Whether State X’s or State Y’s law applies will likely dictate whether the illegality doctrine voids a contract.
Proving impossibility, even in the light of the significant business disruptions caused by the COVID-19 crisis, is very difficult. It requires performance under a contract to be objectively impossible. Practical difficulties and financial unfavourability, even if extreme, are insufficient. An impossibility argument will likely be defeated if the party attempting to assert it can fulfill its promised performance with additional money, time, and/or energy. An example of impossibility might be the wedding situation provided earlier. If a law is passed prohibiting the provision of non-essential services, such as catering services for a wedding, then provision of said services under a contract would be impossible (due to illegality).
The excuse of impracticability excuses nonperformance or non-perfect performance (e.g., a delay in performance) only if an unforeseeable event materially changes the nature of a party’s obligations under the contract. If a contract is subject to the UCC, then the excuse of impracticability, or “commercial impracticability,” will likely be governed by UCC 2-615. The effect increased costs have on a party’s profit is likely not sufficient to meet the standard, nor the collapse of a market. What constitutes commercial impracticability is determined by answering questions of good faith, reasonableness, foreseeability, and the availability of alternative ways to perform.
It is important to note that even when the impracticability excuse is applicable, it is not always a complete excuse. The parties are usually still expected to fulfill the contractual terms in as close a manner to the original terms as possible. What such partial performance looks like is dependent on the species of the contract. It may mean that a party is expected, with a reasonable extension of time (e.g., when the COVID-19 pandemic dies down), to fully perform or it could mean that only a fraction of the goods or services are expected to be delivered on time.
Frustration of Purpose.
The frustration of purpose doctrine may also be used to excuse performance under a contract. Frustration of purpose occurs where a party’s primary contractual purpose is frustrated, by no fault of its own, by an event the nonoccurrence of which was a foundational assumption on which the parties’ contract was executed.
Going back to the wedding example, a frustrating event might include the bride and/or groom’s contracting for 500 roses for the wedding day. It may still be possible to fulfill that contract, but performance of the contract would be meaningless if recent regulations prohibit large gatherings and the wedding had to be cancelled, leaving the bride and groom with no use for the roses.
The courts are typically reluctant to invoke the doctrine of frustration and will not normally do so where the parties have agreed to an express force majeure provision in their contract. The option of frustrating a contract is, therefore, only an option in the absence of a force majeure provision and is, in any event, a high bar to reach.
All four common law excuse doctrines are subject to limitation or preclusion by contractual language. As such, the applicability of these excuse defenses depends on the law governing the contract, contract terms, and relevant facts. Individuals and businesses should seek legal counsel to ascertain the applicability, if any, of the above-discussed common law excuse doctrines.
Disclaimer: This article is designed for general information only. The information presented herein does not constitute legal advice or the formation of a lawyer/client relationship.