Impossibility

The Coronavirus Ate My Homework: Impossibility And Frustration Of Purpose As Excuses For Non-Performance

In my previous post, I discussed the extent of situations where the Coronavirus crisis might excuse non-performance of contracts for the sale of goods under U.C.C. § 2-615. However, even in situations where U.C.C. § 2-615 does not apply, a party faced with contractual obligations dramatically affected by the Coronavirus crisis might still be able to have its performance excused under the doctrines of impossibility or frustration of purpose.[1]

1.      Impossibility

The doctrine of impossibility is limited in its scope, excusing performance only when a supervening event makes fulfilling the contract objectively impossible. Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902 (1987).  The doctrine is narrowly construed, as financial hardship alone is insufficient to invoke this defense, even if performing the contract would drive the affected party into insolvency or bankruptcy. 407 E. 61st Garage v. Savoy Corp., Inc., 23 N.Y.2d 275, 281 (1968); Urban Archaeology Ltd. v. 207 E. 57th Street LLC, 891 N.Y.S.2d 63 (1st Dept. 2009); General Elec. Co. v. Metals Resources Group, Ltd., 293 A.D.2d 417 (1st Dept. 2002).

Moreover, the predicate event triggering the impossibility defense must be one that the parties were unable to foresee when entering into the contract.  Kel Kim, 70 N.Y.2d at 902. When determining whether a predicate event was foreseeable, courts will take the sophistication of the parties into consideration.  See, e.g., Four Asteria Realty, LLC v. BCP Bank of North America, 71 A.D.3d 822 (2d Dept. 2010); Pleasant Hill Developers, Inc. v. Foxwood Enter., LLC, 65 A.D.3d 1203 (2d Dept. 2009).  Accordingly, courts considering impossibility claims will likely need to assess the circumstances surrounding the contract, especially its timing relative to the Coronavirus crisis, as well as whether the contract contained cancellation or similar clauses that arguably anticipated that events disrupting performance may occur, with sophisticated, global businesses getting less of the benefit of the doubt than unsophisticated, locally-focused ones.

The specific nature of the predicate event also matters. Government action, such as orders shutting down “non-essential” businesses, can serve as a predicate for an impossibility defense.  Kolodin v. Valenti, 979 N.Y.S.2d 587, 590 (1st Dept. 2014); A&S Transp. Co. v. Cty. of Nassau, 154 A.D.2d 456, 459 (2d Dept. 1989); Metpath v. Birmingham Ins. Co., 86 A.D.2d 407, 413 (1st Dept. 1982); Moyer v. City of Little Falls, 134 Misc. 2d 299, 302 (Sup. Ct., Herkimer Cty. 1986).[2]  On the other hand, courts have generally been reluctant to find that economic downturns are unforeseeable.  See, e.g., Urban Archaeology, 891 N.Y.S.2d at 63.  Accordingly, a contract rendered impossible as a direct result of governmental actions is more likely to be excused under this defense than one rendered impossible because of the economic disruptions resulting from the Coronavirus.

The length of the Corornavirus-related disruption is also a key factor in assessing the defense.  Where the predicate event creates a temporary impossibility of brief duration, the impossibility may be viewed as only excusing performance until it is possible to perform rather than excusing it all together. Bank of Boston Intern. v. Arguello Tefel, 644 F. Supp. 1423, 1427 (E.D.N.Y. 1986); Bush v. Protravel Int’l, Inc., 746 N.Y.S.2d 790 (Civ. Ct., Richmond Cty. 2002).  However, when the predicate event makes performance impossible for a long or uncertain period, then performance may be excused entirely.  Leisure Time Travel, Inc. v. Villa Roma Resort & Conference Ctr., Inc., 52 N.Y.S.3d 621, 623 (Sup. Ct., Queens Cty. 2017).  While it is likely that Coronavirus-related shutdowns will be of limited duration, assessing whether the Coronavirus will lead to a contract being considered temporarily or permanently impossible will probably turn on an assessment of the nature and purpose of the contract.

Finally, it should be noted that successfully invoking the defense of impossibility will likely not result in a windfall for the avoiding party, as it will need to return any benefit received under the doctrine of restitution.  University of Minn. v. Agbo, 176 Misc. 2d 95, 26 (2d Dept. 1998); Metpath, 86 A.D. 2d at 413.

2.     Frustration of Purpose

Even if impossibility is not an available defense to a contracting party because it may still be able to physically perform its obligations under the contract, it may still be able to avoid performing in situations where the Coronavirus crisis has destroyed the rationale for entering into the contract in the first place.  In such situations, pointless performance may be excused on the grounds of frustration of purpose.

In order to invoke frustration of purpose, 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.” PPF Safeguard, LLC v. BCR Safeguard Holding, LLC, 85 A.D.3d 506, 508 (1st Dept. 2011).  This doctrine is narrowly construed and can only be applied in situations where the purposes of the contract have been substantially frustrated, to the point that the transaction is unintelligible without the frustrated purpose.  See, e.g., Ahrons v. Charpentier, 36 A.D.3d 636 (2d Dept. 2007); Crown IT Services, Inc. v. Koval-Olsen, 11 A.D.3d 263, 264 (1st Dept. 2004). As the name implies, the key inquiry in determining whether frustration of purpose applies is what the actual purpose of the contract was.  In general, courts will examine the language and structure of the contract, using traditional principles of contract interpretation, in order to determine its purpose. In re Fontana D’Oro Foods, Inc., 65 N.Y.2d 886 (1985).  To the extent that the specific purpose of the contract cannot be readily ascertained, the doctrine cannot be applied.  E-Pass Techs. v. Moses & Singer, LLP, No. C-09-5967 EMC (N.D. Cal. Apr. 13, 2012) (applying N.Y. law).  For Coronavirus-related claims, contracts entered into for a specific purpose that no longer makes sense, such as providing services for a now-cancelled event, are likely subject to this doctrine, while more general contracts are less likely to be covered.

Frustration of purpose is subject to some of the same constraints as the impossibility doctrine.  For example, frustration of purpose does not apply in situations where changed circumstances merely makes performance less profitable or even if the avoiding party would suffer a loss by performing.  Rockland Dev. Associates v. Richlou Auto Body, Inc., 173 A.D.2d 690, 691 (2d Dept. 1991).   Frustration of purpose also cannot be invoked in situations where the frustrating event was foreseeable. U.S. v. General Douglas MacArthur Senior Village, Inc., 508 F.2d 377, 381 (2d Cir. 1974); Gander Mountain Co. v. Islip U-Slip LLC, 923 F. Supp. 2d 351, 360 (N.D.N.Y. 2013); Warner v. Kaplan, 71 A.D.3d 1,6 (1st Dept. 2009).    As with impossibility, the sophistication of the parties is taken into account in evaluating whether the event was foreseeable.  Gander Mountain, 923 F. Supp. 2d.  A party invoking frustration of purpose is also subject to the obligation to make restitution for the benefits it has already received. D & A Structural Contrs. Inc. v. Unger, 2009 N.Y. Slip Op. 52026(U) (Sup. Ct., Nassau Cty. 2009).

3.      Conclusion

For contracts that can no longer be performed at all, the doctrine of impossibility may excuse performance, while contracts that can technically be performed but the reasons for doing so no longer exist may be excused due to frustration of purpose.  For either defense to apply, however, the party seeking to be excused performance must show more than mere financial hardship and lack of foreseeability of the events leading to non-performance.

[1] Notably, this discussion presumes that the contract at issue either does not contain a force majeure clause or the clause does not apply.  Legal issues regarding force majeure clauses will be addressed in a subsequent post.

[2] However, as with any predicate event, the government action in question must be unforeseeable at the time of making the contract in order to invoke an impossibility defense. RW Holdings, LLC v. Mayer, 17 N.Y.S.3d 171, 173 (2d Dept. 2015); Inter-Power of N.Y. v. Niagara Mohawk Power, 208 A.D.2d 1073 (3d Dept. 1994); A & S Transp., 154 A.D.2d 459.  **