When trying to understand the full impact of COVID-19 on existing contractual obligations, parties will likely first consult force majeure provisions in their contracts to assess their rights or liabilities for continued performance. An event of force majeure is a circumstance that prevents someone from fulfilling a contract, and many articles recently have been written addressing the contours of typical force majeure clauses.
But what happens where a contract does not contain a force majeure provision? Or, it does but the provision fails to sufficiently identify public health crises or pandemics and any catch-all language is deemed insufficient, rendering the clause inapplicable to COVID-19?[1] Parties may then turn to common law doctrines of impracticability or frustration of purpose, which may apply, depending on the jurisdiction, where the intervening circumstance either changes a basic assumption on which the contract was made so that performance of the contract is impracticable or frustrates the very purpose for the contract in the first place, thereby rendering the contract worthless. The typical remedy for these doctrines is either a full excuse from performance or a rescission of the contract entirely. Oftentimes, however, that is not a desired outcome for a party, who may want to simply hit the “pause button” on its performance and simultaneously stave off an assertion of breach of contract by the other party.
Fortunately, there is an alternative approach, grounded in Section 269 of the Restatement (Second) of Contracts.[2] It provides:
Impracticability of performance or frustration of purpose that is only temporary suspends the obligor’s duty to perform while the impracticability or frustration exists but does not discharge his duty or prevent it from arising unless his performance after the cessation of the impracticability or frustration would be materially more burdensome than had there been no impracticability or frustration.
Restatement (Second) of Contracts, § 269 (1981).
Preliminarily, courts have turned to Section 269 in times of national crises, such as the period following 9/11 as well as the 2008 credit crisis and resulting economic tumultuousness experienced at that time. For example, in Bush v. ProTravel Int’l, Inc., 746 N.Y.S.2d 790 (N.Y. Civ. Ct. 2002), the court invoked Section 269 to conclude that the plaintiff’s requirement to cancel a travel reservation within the contractually-required period was temporarily suspended because “New York City was in the state of virtual lockdown” following the 9/11 terrorist attacks. The court in Bush, which has since been approvingly cited for its application of Section 269 in times of national crises, traced the doctrine to hostilities associated with war time and the rule that “where a supervening act creates a temporary impossibility, particularly of brief duration, the impossibility may be viewed as merely excusing performance until it subsequently becomes possible to perform rather than excusing performance altogether.” Accordingly, consideration of Section 269 during this time of national crisis associated with COVID-19 is certainly warranted.
Thus, while Section 269 operates to temporarily suspend a party’s obligation to perform during the period of impracticality or frustration, it typically does not discharge the obligation altogether. In other words, when the circumstances giving rise to the impracticality or frustration cease to exist, then the parties will be required to perform. For example, in Lohman v. Ephraim, No. B207755, 2010 WL 6901 (Cal. Ct. App. Dec. 30, 2009), the court rejected the defendant’s argument that an agreement to purchase real property was unenforceable at the time it was signed because holdover tenants frustrated the delivery of the property, rendering the owner’s performance impossible. The court reasoned that the holdover tenancy—a temporary condition—did not fully excuse performance: “When the obstacle to performance is only temporary, the duty to perform is not discharged but merely suspended until cessation of the impracticability.” Likewise, in Maudlin v. Pac. Decision Scis., 40 Cal. Rptr. 3d 724 (Cal. Ct. App. 2006), the court emphasized that a deficiency in retained earnings only made a company’s ability to remit payment under a deferred compensation agreement with the plaintiff “temporarily impossible,” so that the company’s obligation to pay would not be discharged but “merely suspended.” See also Culp v. Tri-City Tractor, Inc., 736 P.2d 1348 (Idaho Ct. App. 1987) (“Temporary impossibility [under Section 269] merely suspends the duty of performance until the impossibility ceases.”).
Note that a condition temporarily affecting an obligor’s ability to perform need not make the performance “literally impossible;” rather, the mere presence of circumstances that frustrate the purpose of the act are sufficient to trigger application of Section 269. See Nash v. Bd. of Educ., Union Free Sch. Dist. No. 13, 345 N.E.2d 575 (N.Y. 1976) (giving of the required notice was meaningless during the temporary period of impracticality, so defendant was excused from doing so, but was then “obliged to give notice at the earliest possible opportunity” once the circumstance giving rise to the impracticality had ended).
A frequent issue that arises is whether a party who is obligated to make payments, such as rent payments under a lease, is excused altogether from ever having to make those payments during the temporary period of impracticality or frustration. One case applied Section 269 in the context of a vehicle lease. Schaefer Lincoln Mercury v. Jump, No. 0005-05-86, 1987 WL 642758 (Del. Ct. C.P. June 8, 1987) (unpublished decision). In Schaefer, the lessee was obligated to make monthly lease payments. Approximately nine-months into the four-year lease term, the vehicle sustained irreparable damage, not due to the lessee’s fault, and was unusable during the three-month period that it was in the repair shop. When the lessor attempted to provide a substitute vehicle, the lessee rejected it and attempted to terminate the lease due to the impossibility of performance by the lessor. The court invoked Section 269, holding that the lessee could not terminate the lease outright because the period of frustration was only temporary. But, the court found that the lessee was excused “from making rental payments during the period of time that the purpose of the contract was frustrated” and that the obligation to do so “revives once performance subsequently becomes possible.”
Although Schaefer is an unpublished decision, it is conceivable that lessees, including those in the commercial and retail industries, might point to its analysis as support for the position that they are excused altogether from rental obligations during the period when they are unable to access their premises or operate their business due to COVID-19 (in addition to any other lease-based rights, such as access or co-tenancy, that may be available).
It bears noting, however, that even in the absence of a force majeure clause, the protections of Section 269 will not be available where the delay was contemplated in the contract. This is consistent with cardinal rules of contract construction that the parties’ agreement as expressed within the four corners of the contract will be enforced as written. For example, in Long Signature Homes v. Fairfield Woods, 445 S.E.2d 489 (Va. 1994), the Supreme Court of Virginia held that Section 269 did not excuse a residential developer’s nonperformance where the county temporarily did not have adequate sewer facilities for the new residences—a condition precedent in the contract—given the contract’s own terms. Because the contract provided that the purchaser could delay closing for 60 days after this contingency was satisfied, the contract provision contemplating delay—and not Section 269—governed. In enXco Dev. v. N. States Power, 758 F.3d 940 (2014), the Eighth Circuit similarly declined to apply Section 269, reasoning that administrative delays in obtaining a permit before the contract’s long-stop date were foreseeable and that the obligor could have contracted for a longer long-stop date, avoiding the temporary impossibility.
Finally, as the last line of Section 269 notes, a party’s duty of performance is discharged when the period of impracticability or frustration ends and full performance becomes overly burdensome. For example, in Commonwealth Edison v. Allied-Gen. Nuclear Servs., 731 F. Supp. 850 (N.D. Ill. 1990), the parties entered into an agreement whereby the defendant would reprocess and deliver spent fuel discharged by Commonwealth Edison. The re-processer was required to obtain an operating license to engage in this activity. Soon after entering into the contract, an indefinite moratorium was placed on spent-fuel reprocessing. When the moratorium was lifted years later, however, the re-processing industry was commercially unviable and effectively nonexistent. Citing Section 269, the court found that the re-processor was discharged from its contractual obligations, as performance had become “materially more burdensome.”
In summary, as parties navigate the unpredictable and near daily-shifting landscape of commercial transactions in the wake of COVID-19, they would be well-served to consider the applicability of Section 269 to temporarily suspend performance and avoid being found in breach of contract, without having to terminate the underlying contract altogether.
[1] Of course, there remains the compelling argument, and supportive case law depending on the jurisdiction, that the specification of any force majeure event necessarily precludes, as a matter of contract interpretation, other unspecified events from being qualified to suspend a party’s obligation to perform.
[2] Many states recognize the concept of the temporal restrictions envisioned by Section 269, even if they don't specifically apply Section 269.
