In a previous article on English-language contracts("COVID-19 and Force Majeure Clauses"), we discussed force majeure clauses in light of the huge, disruptive impact the coronavirus disease COVID-19 has had on global commerce. As may be recalled, where a party for reasons beyond its control is unable to perform its obligations due to an exceptional unforeseeable event and its contract has a force majeure clause, that party might be able to rely on this provision to excuse the temporary suspension of performance. As there is no doctrine of force majeure at common law, the availability of this relief depends on the existence of a force majeure clause and the particular terms of any such provision in contracts governed by the laws of the United States, England, and other common law jurisdictions.

 What if parties’ common law-governed contract has no force majeure clause, but one party is unable to perform its obligations due to an exceptional event that was unforeseeable when the parties executed their agreement? In such circumstances, the party potentially might seek to rely on certain doctrines that do exist at common law: impossibility, impracticability, and frustration.

Impossibility, Impracticability, and Frustration

 The doctrines of impossibility, impracticability, and frustration all concern exceptional, unforeseeable events not attributable to contracting parties that may excuse one party’s inability to perform its obligations. There is some variation as to how the terms “impossibility,” “impracticability,” or “frustration” are used and applied across English law and US law (or, more precisely, individual US state laws), but the doctrines can be summarized as follows.

 Most US states recognize the doctrine of impossibility, but often set the bar very high for its application. In the words of one New York decision:

Impossibility excuses performance only when the destruction of the subject matter of the contract or the means of performance make performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.[1]

 Under this narrow interpretation, parties cannot rely on impossibility to be excused from performance if the event in question was foreseeable and, therefore, where the parties could have allocated the risk of the event’s occurrence (for example, changes in markets or financial circumstances). Moreover, as set out above, performance must be “objectively impossible,” which typically has been found when a party dies or becomes incapacitated, or where an element essential to performance under the contract has been destroyed. In some instances, unanticipated government action may make performance impossible (including by making such performance illegal). A court or arbitral tribunal addressing a plea of impossibility will consider whether the event at issue rendered performance genuinely impossible by examining all the relevant factual circumstances concerning the event in question (including impact on a party’s ability to perform) and the terms of the parties’ contract.

 The courts in some US states, including California, have broadened the doctrine of impossibility to encompass unforeseeable events that make a party’s performance of its obligations “impracticable.” Impracticability is a less strict standard than impossibility: a party does not have to show that the event in question made performance “objectively impossible,” but rather that this event made performance unreasonably or excessively costly. However, changes in market or other financial conditions that may be unexpected but are nonetheless reasonably foreseeable, and which merely make performance more expensive or difficult to perform, will not support a plea of impracticability. Here too the determination by a court or tribunal that an event has rendered performance impracticable will depend on all the pertinent facts and contract terms.

 In addition, the laws of most US states recognize the doctrine of frustration of a contract’s purpose by an unforeseeable event. While the doctrine of frustration does not usually require US courts to find objective impossibility of performance, its application is still narrow and does not extend to circumstances where the event has made performance more expensive or difficult to perform. In the words of one New York court ruling, for a party to invoke this doctrine “the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense."[2] English law similarly recognizes the doctrine of frustration:

Frustration of a contract takes place where there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances[.][3]

 Again, whether under the laws of the US or England, a court or tribunal addressing a plea of frustration will examine all the relevant factual circumstances and the terms of the parties’ contract (including, importantly, ascertaining what the parties understood the contract’s purpose to be).

 In sum, when considering contracts governed by the laws of common law jurisdictions, courts and tribunals historically have construed the doctrines of impossibility, impracticability, and frustration narrowly, based on the nature of the unforeseeable event and other facts and the relevant contract language. In part, courts and tribunals have adopted this strict approach because application of these doctrines requires them to decide issues for which the parties themselves have not expressly provided in their contract (as discussed previously, in common law-governed contracts parties are free to agree the terms of their contractual relationship, on the understanding that courts and tribunals will enforce those terms and usually will not look outside the contract to interpret what the parties have intended and agreed). Additionally, the traditional relief for a judgment that a party is unable to perform due to impossibility, impracticability, or frustration is to discharge the parties from further performance under their contract. This is an exceptional remedy that courts and tribunals typically are reluctant to grant.

 Accordingly, parties considering whether to invoke impossibility, impracticability, or frustration are well advised to consult legal counsel in order to avoid inadvertently breaching a contract by relying on these doctrines wrongfully.

COVID-19 and the Doctrines of Impossibility, Impracticability, or Frustration

 Where parties have executed their contracts before the COVID-19 pandemic, courts and tribunals likely will accept that the pandemic was unforeseeable. As indicated above, however, applicability of the effects of COVID-19 to the doctrines of impossibility, impracticability, and frustration will depend on all the relevant factual circumstances and the terms of the contract in question.

 For example, in a case addressing the consequences of an earlier coronavirus outbreak, an apartment tenant in Hong Kong claimed his lease agreement had been frustrated when government health authorities evacuated him from the property and imposed an isolation order during the 2003 SARS epidemic.[4] The court, however, ruled that the agreement was not frustrated because the isolation order was only for 10 days, while the term of the lease agreement was two years.

 This decision highlights the importance of the specific facts regarding the impact of the unforeseeable event when assessing the applicability of frustration, impossibility, or impracticability. In response to COVID-19, many governmental authorities have implemented restrictions on social and business activities, including commercial endeavors that may involve performance of contractual obligations. When considering the application of frustration, impossibility, or impracticability to such circumstances, courts and tribunals can be expected to assess the nature of the restrictions, their duration, and their relationship to a party’s claimed inability to perform its obligations under the terms of the contract.

 In another, US case, a large-scale egg producer aiming to build a new production plant contracted with a manufacturer to supply and install an industrial egg dryer at the future facility.[5] However, an outbreak of Avian Influenza, a disease that infected poultry in the US in 2015, compelled the egg producer to destroy a large number of its chickens, prompting it to abandon the planned facility and to inform the manufacturer it would not proceed with installation of the industrial egg dryer. A dispute arose and the matter went to court, with the egg producer claiming it was excused from performance under both the contract’s force majeure clause and under the doctrine of frustration of purpose. In a pre-trial judgment, the court rejected the first claim because the outbreak of Avian Influenza was not a force majeure event as defined in the contract.

 As to frustration, the parties offered different accounts of the primary purpose of their agreement. The egg producer contended the contract’s main purpose was to enable it to establish a new relationship with a particular business partner in a specific timeframe, while the manufacturer argued that the purpose was supply and installation of an egg dryer for the producer’s general expansion plans and the dryer at issue could be installed at another facility belonging to the producer. The US court explained that, based on the contract language and the parties’ pleadings alone, it could not determine what was the principal purpose of the contract, and because “there is no way to resolve the ‘frustration’ issues without making detailed factual findings,” it ruled these issues would have to be evaluated and decided at trial.[6] At trial the court rejected the egg producer’s frustration argument. In addition to illustrating the heavy burden parties typically bear when claiming frustration – also true for impossibility and impracticability – this case again highlights the significant role individual factual circumstances play in determining whether this or the other doctrines may apply.

Practical Tips

 If parties are facing situations in which the impacts of COVID-19 potentially may implicate the doctrines of frustration, impossibility, or impracticability, they should review their contract to see what is the governing law; as indicated above, this can affect which of these doctrines may be available (and if so, the likely scope of the doctrine’s application). Parties also should create and maintain documents of the relevant circumstances (for example, correspondence and other communications concerning the event and how this event has affected performance of contractual obligations). Such documentation is important to support (or challenge) any invocation of the doctrines, as well as provide evidence if a dispute arises.

 When drafting new contracts parties may wish to consider setting out the contract’s purpose in the recitals (see the article, "English-language Contracts: Introductory Provisions"). Doing so would better enable the parties and, if necessary, any court or tribunal, to consider whether an event has frustrated the purpose of the contract.

Concluding Thoughts

 As discussed above, in contracts governed by the laws of the United States, England, and other common law jurisdictions, application of the doctrines of frustration, impossibility, and impracticability will depend on the relevant factual circumstances and the terms of the contract in question. Courts and arbitral tribunals have construed these doctrines narrowly, and while some commentators suggest that the COVID-19 pandemic could lead to some loosening of their application, caution is recommended. Whether due to the effects of COVID-19 or otherwise, parties facing events that potentially trigger frustration, impossibility, and impracticability are well advised to consult counsel before invoking these doctrines.

 

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[1] Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900 (1987).
[2] Crown IT Servs., Inc v. Koval-Olsen, 11 A.D.3d 263, 265 (N.Y. App. Div. 2004).
[3] National Carriers Ltd v. Panalpina (Northern) Ltd ., [1981] 1 AC 675, 700.
[4] Li Ching Wing v Xuan Yi Xiong [2004] 1 HKC 353.
[5] Rembrandt Enters. Inc. v. Dahmes Stainless Inc., No. C15-4248-LTS (N.D. Iowa Sep. 7, 2017).
[6] Id. at 17.

 

The information provided in this article does not, and is not intended to, constitute legal advice and is for general informational purposes only. Readers of this article should contact an attorney to obtain advice with respect to any particular legal matter.