Many business owners may feel as if the Coronavirus and its consequences are making it, impossible, impracticable, and frustrating to perform their contractual obligations. They may be unable to get the supplies they need to produce products. They may have been forced to shut down their business or significantly reduce their business operations. They may simply not have the demand for their services that they had pre-Coronavirus. The legal doctrines of impossibility, impracticability, and frustration – legally known as frustration of purpose – don’t necessarily have the same definitions that a business owner may expect and in Maryland there is no court ruling or statute that makes it clear that the pandemic will excuse a business owner from performing their contractual obligations.
Generally under the doctrine of impossibility, a party’s contractual obligations can be excused if performance becomes objectively impossible because of a supervening event. For a party to successfully use this excuse, performance must be impossible, not just financially unappealing or slightly more difficult, regardless of any amount of time, money or energy spent. For example, performance may be excused when the subject matter of the agreement is destroyed.
Under the doctrine of impracticability, performance, or delays in performance, are excused if a supervening event materially changes the inherent nature of a party’s obligations to become substantially more difficult, complex, or challenging. These material changes result in excessive and unreasonable increase in performance costs.
Frustration of purpose is a limited excuse that applies when, due to a supervening event, a party’s principle purpose for entering the transaction is destroyed or obviated. With this excuse, performance is not impossible but one party’s reason for doing the deal no longer exists. It can only be used if the party seeking to be excused can no longer accomplish his purpose for the transaction, both parties knew of the frustrated party’s principal purpose for entering the contract, and a qualifying supervening event caused the frustration of purpose. It is important to note that, unlike impossibility, performance remains possible, but is excused when one party would no longer receive the expected value of their counterparty’s performance.
A review of Maryland cases where courts have applied these doctrines indicates that Maryland has moved away from the strict impossibility standard and requires “impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved.” Baltimore Luggage Co. v. Ligon, 208 Md. 406, 417-18(1955).
For a contract to be impracticable three factors must be present. First, “[c]ircumstances existing at the contracting date and foreseeability” of the impracticability have to be considered. Heat Exchangers, Inc. v. Map Constr. Corp., 34 Md. App. 679, 688 (1977). If the circumstance that causes performance to be impracticable was foreseeable when the contract was executed, then the contract will likely be enforceable. The other two factors are you did not assume the risk of the event that made it impracticable or impossible and you did not cause the event to occur.
Frustration of purpose is similar to impossibility and impracticability. Frustration of purpose requires that “the purpose that is frustrated must have been a principal purpose of that party in making the contract.” Restatement (Second) of Contracts, § 265 cmt. a. “Second, the frustration must be substantial.” Id. “Third, the non-occurrence of the frustrating event must have been a basic assumption on which the contract was made.” Id.
Maryland courts have also looked to frustration of purpose when determining parties’ obligations under a contract. In finding that a former husband was not excused from paying monthly spousal support and maintenance payments after his ex-wife began cohabitating with another man, the court noted that the frustration of purpose is when a contract is completely frustrated and rendered impossible to perform by a supervening event or circumstance. Panitz v. Panitz, 144 Md. App. 627, 639 (2002). The three part test the court applied in the case was whether the intervening act was reasonably foreseeable, whether the act was an exercise of sovereign power and whether the parties were instrumental in bringing about the intervening event.
Determining whether you will be excused from performing your contractual obligations due to impossibility, impracticability, or frustration will turn on the language in your contract and specific facts that are present in your industry. This will almost certainly not be a one size fits all approach and any business owner seeking to apply these doctrines to excuse or delay their performance under a contract or have a party comply with their contract obligations should consult with an experienced commercial litigation attorney in their jurisdiction.
Aidan Smith is an AV rated trial attorney who has represented individuals and businesses of all sizes in state and federal courts and before arbitration panels throughout the State of Maryland. He practices in the areas of commercial litigation, real estate litigation, general civil litigation, criminal defense and family law. He can be reached at 410-339-6764 or firstname.lastname@example.org.