Temporary Impracticality or Frustration of Construction Contracts During the COVID-19 Pandemic

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Owners and contractors trying to understand the full impact of COVID-19 on their projects are likely turning to delay[1] or force majeure provisions in their construction contracts to assess their rights or liabilities for continued performance. An event of force majeure is a circumstance that prevents someone from fulfilling a contract, and many articles recently have been written addressing the contours of typical force majeure clauses. 

 But what happens where a construction contract does not contain a force majeure provision? Or, it does but the provision, or similar delay clause, fails to sufficiently identify public health crises or pandemics and any catch-all language is deemed insufficient, rendering the clause inapplicable to COVID-19?[2] Parties may then turn to common law doctrines of impracticability or frustration of purpose, which may apply, depending on the jurisdiction, where the intervening circumstance either changes a basic assumption on which the construction contract was made so that performance of the contract is impracticable or frustrates the very purpose for the contract in the first place, thereby rendering the contract worthless. The typical remedy for these doctrines is either a full excuse from performance or a rescission of the construction contract entirely. Oftentimes, however, that is not a desired outcome for a party, who may want to simply hit the “pause button” on its performance and simultaneously stave off an assertion of breach of contract by the other party. 

 Fortunately, there is an alternative approach, grounded in Section 269 of the Restatement (Second) of Contracts.[3]  It provides: 

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 (Second) of Contracts, § 269 (1981).

 Preliminarily, courts have turned to Section 269 in times of national crises, such as the period following 9/11 as well as the 2008 credit crisis and resulting economic tumultuousness experienced at that time. For example, 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 in Bush, which has since been approvingly cited for its application of Section 269 in times of national crises, traced the doctrine to hostilities associated with war time and the rule 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.” Accordingly, consideration of Section 269 during this time of national crisis is certainly warranted, with the construction industry reeling from the effects of COVID-19. 

Thus, while Section 269 operates to temporarily suspend a party’s obligation to perform during the period of impracticality or frustration, it 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. Section 269 has frequently been applied to construction projects. 

 For example, 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.

 Similarly, in 4900 Patrick Henry Drive Assocs. v. Keith Roofing., No. H032721, 2009 WL 1508515 (Cal. Ct. App. May 29, 2009), 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. For example, 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. 

 It bears noting, however, that even in the absence of a force majeure clause, the protections of Section 269 will not be available where the delay was contemplated in the contract. This is consistent with cardinal rules of contract construction that the parties’ agreement as expressed within the four corners of the contract will be enforced as written. For example, in Long Signature Homes v. Fairfield Woods, 445 S.E.2d 489 (Va. 1994), the Supreme Court of Virginia held that Section 269 did not excuse a residential developer’s nonperformance where the county temporarily did not have adequate sewer facilities for the new residences—a condition precedent in the contract—given the contract’s own terms. Because the contract provided that the purchaser could delay closing for 60 days after this contingency was satisfied, the contract provision contemplating delay—and not Section 269—governed. In enXco Dev. v. N. States Power, 758 F.3d 940 (2014), the Eighth Circuit similarly declined to apply Section 269, reasoning that administrative delays in obtaining a permit before the contract’s long-stop date were foreseeable and that the obligor could have contracted for a longer long-stop date, avoiding the temporary impossibility.

 In summary, as owners and contractors navigate the unpredictable and near daily-shifting landscape of construction projects in the wake of COVID-19, they would be well-served to consider the applicability of Section 269 to temporarily suspend performance of their respective obligations and to avoid being found in breach of contract, without having to terminate the underlying construction contract altogether.

 

[1] Parties using industry-standard forms such as those published by the American Institute of Architects or ConsensusDocs will need to refer to delay-provisions, as those forms do not include traditional force majeure clauses.  See AIA Document A201 § 8.3 and ConsensusDocs 200, § 6.3.

[2] Of course, there remains the compelling argument, and supportive case law depending on the jurisdiction, that the specification of any force majeure event necessarily precludes, as a matter of contract interpretation, other unspecified events from being qualified to suspend a party’s obligation to perform.

[3] Many states recognize the concept of the temporal restrictions envisioned by Section 269, even if they do not specifically apply Section 269.