19 March 2020

Evaluating Whether COVID-19 Excuses Nonperformance Based on Impossibility, Frustration of Purpose, or Impracticability

***Information and guidance in client updates was up to date at time of publication. During the pandemic, information and guidance has been changing rapidly. If you have any questions about the information contained in a client update, please contact the author(s) or your Miller Johnson attorney.***

Many businesses are concerned about the effect that COVID-19 will have on their supply chains.  One pressing issue is this: Can a customer or supplier excuse its performance, either because the pandemic has rendered performance under a contract impossible or impracticable, or because the pandemic has frustrated the contract’s purpose?

Under the common law, impossibility, frustration of purpose, and impracticability may excuse performance of a contract if they are based on an unforeseeable event occurring after the contract was made.  But contracts can change the common law, so the first step is to carefully review your contract, including any terms and conditions, for any references to these excuses.  And if the contract includes a term that allocates the risks associated with a global crisis like this one—such as a force majeure clause that specifically references a pandemic or viral outbreak—that contract term controls.

If a contract does not specifically address impossibility, frustration of purpose, and impracticability, then we look to the common law and statutes, including the UCC.

Impossibility is difficult to prove, even in light of the extreme disruptions caused by the COVID‑19 pandemic.  Impossibility requires the performance to be objectively impossible, not just financially unfavorable or impractical.  If a party can render performance with additional time, money, energy, or resources, impossibility is not an excuse.  Illustrating the high bar to show impossibility, one court rejected that excuse even where a company would have had to consider filing for bankruptcy because its continued performance was costing it millions of dollars per day.

Frustration of purpose is limited to situations in which a party’s primary purpose for entering the transaction is frustrated, through no fault of the party, by an event the nonoccurrence of which was a basic assumption on which the contract was made.  And the excuse only applies if both parties understood that purpose to be a principle purpose of the contract.  A classic example of frustration of purpose is the parade cancellation: Party A rents a space from Party B to watch a parade, but the parade is cancelled.  Under the common law, Party A may be excused from payment, but only if Party B understood that Party A’s only reason for renting the space was to watch the parade.  This example presents a helpful analogy today:  If a contract’s purpose is totally frustrated by cancellations caused by the pandemic and outside of the parties’ control, then a party may have an excuse for nonperformance based on frustration of purpose.  But as with any of these excuse doctrines, the parties may alter by contract the availability of this excuse.

Likely, the most relevant excuse for nonperformance in the context of the COVID-19 pandemic is impracticability—but that defense is also difficult to prove.  Impracticability excuses nonperformance or delays in performance only if an unforeseeable event materially changes the nature of a party’s obligations under the contract.

Under the UCC, the excuse of impracticability, also known as “commercial impracticability,” is governed by UCC 2-615.  Importantly, increased cost alone does not excuse performance, nor does a rise or collapse of a market.  But a severe shortage of raw materials that prevents a seller from securing necessary supplies may be sufficient to claim commercial impracticability.  It comes down to questions of foreseeability, reasonableness, good faith, and the availability of alternative ways to perform.

Impracticability, even when applicable, may not be a complete excuse.  The parties still must fulfill the contract to the extent possible.  This may mean that a party is still required to perform partially during the pandemic, or resume full performance once the pandemic passes with a reasonable extension of time to perform.

The applicability of defenses based on impossibility, frustration of purpose, and impracticability depend on the governing law and the relevant facts and contract terms.  The Miller Johnson team is here to assist you in assessing your contract rights as you navigate supply chain disruptions caused by COVID-19.