Temporary or Partial Impracticability and Frustration of Purpose and Pandemic Affected Contracts and Leases

The Restatement 2d of Contracts finished in 1981, added concepts of  temporary and partial impracticability and also restitution or reliance  damages to ameliorate loss. While traditional application of such  doctrines would lead to a finding that the contract automatically  terminates, other cases state that if the frustration or impracticability is  only temporary, then so is the hold on obligations (i.e. paying rent on office  space when Santa Clara County ordinance forbids non-essential office  use). This will obviously be only temporary. 

Thus, the Restatement 2d Contracts Section 269 operates to  temporarily suspend a party’s obligation to perform during the  period of impracticality or frustration, but 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. 

It is conceivable that commercial and retail lessees might point to Section  269 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). 

Restatement 2d Contracts 269: 

Temporary Impracticability or Frustration 

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 2d Contracts 270: 

Partial Impracticability 

Where only part of an obligor's performance is impracticable, his duty to  render the remaining part is unaffected if 

(a) it is still practicable for him to render performance that is substantial,  taking account of any reasonable substitute performance that he is under  a duty to render; or 

(b) the obligee, within a reasonable time, agrees to render any remaining  performance in full and to allow the obligor to retain any performance that  has already been rendered. 

Restatement 2d Contracts 272: 

Relief Including Restitution 

  1. In any case governed by the rules stated in this Chapter, either party  may have a claim for relief including restitution under the rules stated  in Sections 240 and 377. 
  2. In any case governed by the rules stated in this Chapter, if those  rules together with the rules stated in Chapter 16 will not avoid  injustice, the court may grant relief on such terms as justice requires  including protection of the parties' reliance interests. 

Case Law 

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 stated 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.” 

In Lohman v. Ephraim, No. B207755, 2010 WL 6901 (Cal. Ct. App. Dec.  30, 2009)(unpublished), 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. Temporary impracticability  discharges the duty to perform only where performance after cessation of  the impracticability "would be materially more burdensome than had there  been no impracticability . . ." (Rest. 2d Contracts, § 269.)” 

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 —unless the delayed performance  becomes materially more burdensome or the temporary impossibility  becomes permanent.” The Court noted that the California law on  temporary impossibility mirrors the Restatement 2d Contracts section 269.  

In G.W. Andersen Constr. v. Mars Sales, 210 Cal. Rptr. 409 (Cal. Ct.  App. 1985), the court interpreted Section 269 as it applied to both  parties. The plaintiff-contractor and defendant-owner entered into a  contract for the construction of a building. After the plans had been  drafted but before the construction contract was signed or any payment  rendered, the city in which the building was to be constructed imposed a  construction moratorium; the parties were not aware of the moratorium  when they subsequently signed the contract. The court concluded that  the delay in construction of the project did not, by itself, discharge the  owner’s obligation to pay the deposit, as the delay was insubstantial to  the nature of that obligation. For similar reasons, the court held that the  mere fact that the delay created a risk of increased costs owing to price  changes in the construction industry did not excuse performance entirely,  as any such risk was too speculative at that time. The court noted, however, that the owner was temporarily excused from paying the  deposit while the impossibility existed. 

In 4900 Patrick Henry Drive Assocs. v. Keith Roofing., No. H032721,  2009 WL 1508515 (Cal. Ct. App. May 29, 2009)(unpublished), an owner  hired a contractor to repair and replace a roof. When the contractor  discovered the presence of rotting beams, it suspended its work while the  owner hired another contractor to repair the rotting beams. During that  time, a rain storm caused a large amount of water to enter the premises.  The owner tried to recover damages from the contractor, alleging that it  failed to adequately cover openings of the roof to safeguard the property’s  interior. The court found in favor of the contractor, observing in part that its performance was suspended because of the repair of the rotting beams.  The court cited Section 269 and opined that the discovery of the rotting  beams “made it temporarily impossible” for the contractor to complete its  roofing work and, accordingly, the contractor could not be held liable for  breach of contract regarding the water damage. 

When the circumstances giving rise to the impracticality or frustration  cease to exist, then Section 269 affords a party a reasonable time to  resume performance. In Glen Hollow P’Ship v. Wal-Mart Stores, 139  F.3d 901 (7th Cir. 1998), Wal-Mart entered into a contract with the  plaintiff-contractor for the construction of a shopping center that Wal-Mart  would then lease. Local residents filed a lawsuit challenging the city’s  commercial zoning of the property. More than six months after the end of  that lawsuit, the contractor had still not begun construction, and Wal- Mart  terminated the lease. The contractor filed its own lawsuit for breach-of contract and prevailed in the trial court. On appeal, the Seventh Circuit  recognized Section 269’s application given the temporary impossibility in  construction due to the rezoning dispute, and highlighted that “[o]nce the  governmental regulations no longer delayed performance, [contractor]  would have a reasonable extension of time to perform.” The court  ultimately held, however, that the contractor’s delay in beginning  construction even six months after the rezoning litigation had concluded  was not proximately caused by the rezoning dispute, but was actually  caused by the contractor’s own inability to finance the project.

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.”). 

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). 

Schaefer Lincoln Mercury v. Jump, No. 0005-05-86, 1987 WL 642758  (Del. Ct. C.P. June 8, 1987)(unpublished) In Schaefer, the vehicle 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.” 

As stated in Section 269, 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.” 

                        author

Frank Burke

Frank Burke is a full time neutral and handles mediation and arbitration matters on Zoom and in offices in San Francisco, San Jose and Oakland. He focuses on business, commercial, real estate, technology, trade secrets, patents, corporate governance, employment and personal injury matters.    He applies his 42 years of… MORE >

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