New Decisions Give Further Guidance on Frustration of Purpose, Impossibility, and Related Doctrines

As discussed in previous updates (the most recent of which you can find here, here, and here), courts across the country continue to grapple with the application of the legal doctrines of impossibility, frustration of purpose, and impracticability in breach of contract actions precipitated by the COVID-19 pandemic. Courts have reached mixed results about whether the doctrines can be invoked when dealing with breaches caused or hastened by the pandemic, with the particulars of each case and the context of the action, including the specific reasons the litigants are invoking the doctrines, driving the varying decisions.

In re Condado Plaza Acquisition LLC¹

A New York bankruptcy court recently examined the effect of the COVID-19 pandemic on the performance of a contract for the purchase of a hotel in Puerto Rico.²The parties entered into the sale contract in November 2019, with the closing date extended by the parties multiple times.³The seller attempted to close in May 2020, but the buyer refused. The seller accordingly asserted that the buyer was in default. Based on that default, the seller opted to terminate the contract, rather than seek specific performance or damages, in the apparent hope of finding a new buyer for the hotel.⁴In September 2020, the buyer filed for bankruptcy.⁵

The buyer then argued that its deadline to purchase the hotel should be extended pursuant to section 108(b) of the Bankruptcy Code, which provides that under certain circumstances, certain deadlines to take an action can be extended if they had “not expired before the date of the filing of the [bankruptcy] petition.”⁶The buyer argued that the seller was not able to deliver “an operating hotel” in May 2020 due to the COVID-19 pandemic, and thus the buyer had no obligation to purchase the hotel at that time, such that the closing date and contract itself were instead extended indefinitely.⁷The seller disputed this and requested the case’s dismissal or alternatively, relief from the automatic bankruptcy stay.⁸

Among other things, the buyer invoked the doctrines of frustration of purpose, impossibility, and commercial impracticability in support of its argument.⁹The buyer contended that the purchase contract was predicated on buyer being able to purchase an operating hotel, and that purpose was frustrated when the hotel was required to close due to the pandemic. The bankruptcy court stated that it was “skeptical” of this argument, including because the contract “expressly disclaimed any obligation to maintain operations at the hotel.”¹⁰The court held that, in any event, if the contract’s purpose was frustrated, the buyer would, at best, have “a defense to enforcement of the” contract; the doctrine could not extend the life of the contract.¹¹The court also expressed skepticism regarding the buyer’s impossibility and commercial impracticability arguments, including because the buyer had reaffirmed the agreement “in mid-March when the pandemic was already underway and the [government] order closing the hotel was already in effect.”¹²Like frustration of purpose, the court held that, in any event, impossibility and commercial impracticability could only excuse performance, not extend the duration of the contract.¹³ Accordingly, the court rejected the buyer’s arguments that such doctrines “can be invoked to provide an extension of the time-of-the-essence deadline for closing,”¹⁴and held, among other things, that sections 108(b) and 365 of the Bankruptcy Code did not apply since the contract terminated before the buyer filed for bankruptcy.¹⁵

Rosado v. Barry University¹⁶

A Florida federal court examined a university’s contractual obligations to its students during the COVID-19 pandemic. A student sued the university she was attending, arguing that the school was required to provide in-person instruction. The university moved to dismiss. After determining that the student had adequately pled a breach of contract by the university, the court considered whether the university’s performance was excused.¹⁷

In particular, the university argued that its performance was excused since the COVID-19 pandemic made providing in-person classes impossible and also frustrated the purpose of the contractual provisions regarding in-person classes. The court rejected the university’s argument that these doctrines required dismissal of the student’s complaint at the pleading stage. First, the court held that the mere existence of the COVID-19 pandemic “does not conclusively establish the defense of impossibility or frustration of purpose on the facts alleged, particularly given the overlapping and sometimes contradictory state and local regulations, and evolving standards, for dealing with the virus.”¹⁸

Second, the court held that it was not clear which party should bear the risks associated with the COVID-19 pandemic based on the contractual language: if the university bore the risk, then the university’s arguments could not defeat the student’s claims. The court noted that there was some indication that the university should bear the risks associated with the pandemic, since “[i]t would certainly be anomalous, without sufficiently strong evidence of contractual intent, to permit a party to reap the full benefits of an agreement in return for only partial performance.”¹⁹Accordingly, the court held that the complaint would not be dismissed at this stage and that discovery would proceed.

There are similar lawsuits regarding in-person instruction pending against schools across the country. It remains to be seen whether those courts will take a similar approach.

Takeaways:

Whether contractual performance will be excused based on the doctrines of impossibility, commercial impracticability, or frustration of purpose is a fact-specific inquiry that will turn on the at-issue contractual language and surrounding facts. Courts across the country are treading carefully on these issues, recognizing the severe impacts of the COVID-19 pandemic while also recognizing that the doctrines cannot be invoked in all cases. Given the rapidly-evolving legal landscape, it is important for individuals and businesses to continue to monitor these developments.

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1.  2020 WL 6038813 (Bankr. S.D.N.Y. Oct. 9, 2020).
2.  Id. at *1.
3.  Id.
4.  Id.
5.  Id. at *2.
6.  11 U.S.C. § 108(b).
7.  2020 WL 6038813, at *8.
8.  Id. at *2-3.
9.  Id. at *13.
10.  Id. at *14.
11.  Id.
12.  Id.
13.  Id.
14.  Id. at *15.
15.  Id.
16.  2020 U.S. Dist. LEXIS 204355 (S.D. Fla. October 30, 2020).
17.  Id. at *7-11.
18.  Id. at *12.
19.  Id. at *12-13.