Client Alert: An Introduction to the Doctrines of Impossibility and Frustration of Purpose
Even in its early stages, there is no doubt that the COVID-19 pandemic and its accompanying social distancing, quarantines, mass-closings of businesses and institutions, and governmentally-mandated restrictions on public assembly, travel and dining-out, have rendered many pre-pandemic contractual obligations difficult, or impossible, to perform. As discussed in our March 13, 2020 Client Alert (available here), force majeure clauses may excuse certain types of contractual performance. Additionally, governmental intervention or business interruption insurance, to the extent available, might mitigate some economic losses. However, what happens when neither a force majeure clause, business interruption insurance, nor governmental intervention can provide the desired relief? In that situation, businesses may be forced to rely on the seldom-used legal doctrines of “impossibility” and “frustration of purpose” as defenses against onerous pre-crisis contractual obligations.
The contractual defense of impossibility may be applied where a particular condition, which both parties to the contract assumed would continue when the contract was signed, ceases to exist as a result of an unforeseeable supervening event occurring without the fault of either party. For example, it seems obvious that the parties to a contract booking a venue for a music festival assumed that gatherings of more than 250 people would not be prohibited by state law when the booking contract was signed. However, that condition clearly ceased to exist when Massachusetts Governor Charlie Baker prohibited such public assemblies. Moreover, while the foregoing example is a useful illustration of where the defense of impossibility might clearly be applicable, under Massachusetts law, an outright governmental ban on the contract’s purpose is not always required for a contract party to utilize the defense of impossibility. Notwithstanding the doctrine being called “impossibility,” under Massachusetts law, dramatically increased difficulty and expense of performance can implicate virtual, if not actual, impossibility.
In addition to the doctrine of impossibility, Massachusetts courts have also applied the doctrine of frustration of purpose, which is a ‘companion doctrine’ of impossibility. As set forth in the case of Chase Precast Corp. v. John J. Paonessa Co., Inc., 409 Mass. 371 (1991), the doctrine of impossibility and the doctrine of frustration of purpose “differ only in the effect of the fortuitous supervening event.” As illustrated by the above example, where performance under a contract for a music festival booking agreement would likely be excused due to governmental prohibition on public assembly, impossibility is appropriate where the object or purpose of a contract is destroyed, thus destroying the value of performance. Frustration of purpose, on the other hand, may be available when contractual performance remains possible, but such performance would produce a dramatically different result from what the parties anticipated when the contract was signed. For example, frustration of purpose might be a valid defense to contractual performance if, using our hypothetical music festival example again, we assume that there is no ban on public assembly, but air, bus and rail travel to the festival location are all banned or dramatically restricted. In this hypothetical example, holding the festival would be possible, but the travel restrictions would make it far more difficult for ticket-holders and performers to get to the venue than was anticipated when the festival booking agreement was signed.
Whether utilizing the defense of impossibility or frustration of purpose, one of the most important factors that courts consider when deciding whether to excuse performance is whether the intervening event was foreseeable when the contract was signed. If the intervening event was not foreseeable, and the intervening event rises to the level of destroying the object of the contract (if the defense is impossibility) or dramatically changing the expected value of the contract (if the defense is frustration of purpose), it is possible that contractual performance will be excused, even without the protection of a force majeure clause. On the other hand, if the intervening event was foreseeable, absent a useful force majeure clause, the courts may find in favor of strict contractual compliance. Whether or not a pandemic like the current COVID-19 crisis, and the myriad adverse consequences resulting therefrom, was or should have been foreseeable at the time in question is an issue that we expect to be litigated in courts around the country in the near future.
Whether you are attempting to collect business interruption insurance, rely on a force majeure clause, or rely on the doctrines of impossibility or frustration of purpose, be sure to stay in close contact with your attorney during these uncertain times. Now more than ever, good legal counsel is critically important. Finally, remember to put your own health, and the health of those around you, above any legal or economic concerns. As the old saying goes, “if you don’t have your health, you don’t have anything.”