The COVID-19 pandemic is inflicting human misery and wreaking economic havoc. In most areas — including Missouri — local and state governments ordered non-essential businesses to shut down and required non-essential workers to work from home, if possible, in an effort to slow the spread of infection. This response sparked a recession with unemployment at Great Depression levels. These dynamics raise the question of whether the pandemic excuses a business from complying with its contractual obligations when doing so is arguably impossible, unlawful or inflicts severe financial hardship.
Because each case turns on its unique facts, most critically the specific language of the contract at issue, there are no easy answers. Much could turn on what the court perceives as the equities of the particular dispute. Because case law addressing the legal doctrines of commercial impracticability and frustration, and their contractual companion force majeure, is “muddled and inconsistent,” it is difficult to predict how courts will apply them to the COVID-19 context, as professor Jennifer Camero observed in her University of New Hampshire Law Review article “Mission Impracticable: The Impossibility of Commercial Impracticability.” Nonetheless, this article summarizes those legal doctrines and analyzes their potential viability under Missouri law in the COVID-19 context to help businesses and their counsel develop arguments for or against excusing performance.
In 1998, the Missouri Supreme Court in Farmers’ Elec. Coop. Inc. v. Missouri Dep’t of Corr. reaffirmed the well-established contract doctrine of impossibility of performance, holding that “if a party, by contract, is obligated to a performance that is possible to be performed, the party must make good unless performance is rendered impossible by an act of God, the law, or the other party.” As held in 2009 by a Missouri appellate court in Clean the Unif. Co. v. Magic Touch Cleaning Inc., this defense is difficult to sustain, as a “party pleading impossibility as a defense must demonstrate that it took virtually every action within its powers to perform its duties under the contract” and did not by “its own act place itself in a position to be unable to perform a contract.”
The modern rule, which requires only impracticability, not literal impossibility, was incorporated into the first Restatement of Contracts in 1932 and then into Article 2 of the Uniform Commercial Code in 1950. In 1981, it was adopted even more expansively in Sections 261 and 265 (and related sections) of the Restatement (Second) of Contracts. Missouri courts generally look to the Restatement for guidance in this area, including Section 261. That section excuses performance when it is “impracticable,” which a comment to that section defines as causing “extreme and unreasonable difficulty, expense, injury, or loss to one of the parties … involved.” Missouri also has adopted Section 2-615 of Article 2 of the Uniform Commercial Code, which, as interpreted in Am. Laminates v. J. S. Latta Coh, governs commercial impracticability for both buyers and sellers under contracts for the sale of goods. In that 1998 decision, the court held that the “doctrine’s purpose is to do equity — to intervene when enforcement of a contract would be unjust.”
Section 265 excuses performance when an event frustrates the bedrock purpose of the contract. Although the Missouri Supreme Court has yet to adopt that section’s commercial frustration rule, Missouri lower courts and federal courts applying Missouri law often have, beginning with the 1977 state court decision in Howard v. Nicholson. This defense is limited, too. To prevail on it, the Howard court held, a breaching party must “establish that there was a total or practically total destruction of the purpose or object of the transaction.”
Courts across the country have long dealt with commercial impracticability and frustration in many contexts, from the flu epidemics of the late 19th and early 20th centuries, world wars, the closing of the Suez Canal in 1957 and the oil crisis of the 1970s, to the more recent global financial crisis that began in 2008. The cases evince a pronounced reluctance to excuse contractual performance absent a clear contractual directive to do so, with courts repeatedly affirming that these legal defenses can be successfully invoked only in the rarest of circumstances. As noted by professor Camero, “most commercial impracticability cases correlate to some significant national or international economic crisis, and almost always decline to permit excuse under commercial impracticability.” These legal doctrines are thus not the panacea that parties struggling in a COVID-19 world to meet their contractual obligations might hope them to be.
Next in part 2: Missouri law on force majeure clauses in the context of COVID-19
John Petite is an officer in the litigation practice group at Greensfelder, Hemker & Gale.