Two years ago, at the beginning of the pandemic, Dressel/Malikschmitt authored a blog predicting that many New Jersey businesses would soon find themselves in litigation over breached contracts. Unfortunately, we were right.
We never could have anticipated the full scale of the COVID-19 pandemic, the impacts of which will endure for years to come. But we were right that it would force many businesses to breach their contracts. And we were also correct in suggesting that businesses would attempt to rely on the breach defenses of frustration of purpose and impossibility to protect themselves.
If forced to make another prediction, it would not be a return to “normal” levels of contract disputes anytime soon. While the COVID-19 pandemic is becoming endemic, things are not going back to business as usual. There is still a lot of uncertainty in the world because:
- The supply chain is still vulnerable.
- The labor market is extremely tight.
- Inflation is rising at the fastest rate in decades.
- Russia has created great instability with its invasion of Ukraine.
All of these are interfering with contracts, and all of them happening all at once is a perfect storm. Dressel/Malikschmitt expects frustration of purpose and impossibility to play a key role in business disputes for the foreseeable future.
What is Frustration of Purpose?
When a contract is breached, the breaching party may defend themselves by claiming that it would have been pointless to see the agreement through. The legal name for this defense is “frustration of purpose.”
The classic example of this comes from the British case Krell v. Henry. In that case, an individual purchased the right to use another individual’s apartment to view a parade. The parade was canceled, and the purchaser refused to pay for use of the apartment, as the purpose of using the apartment was frustrated. The court agreed and refused to uphold the contract.
There are three parts to a successful frustration of purpose defense:
- The purpose that is frustrated must have been a principal purpose of that party in making the contract;
- The frustration must be substantial; and
- The non-occurrence of the frustrating event must have been a basic assumption on which the contract was made.
Figuring out if these elements exist is contract and fact-specific, so what happens in one case may not be a good predictor of what happens in another. This is why it is important to consult with an experienced attorney like those at Dressel/Malikschmitt if you are involved in a business dispute.
How is Impossibility Different?
Another common defense, which is essentially the inverse of frustration of purpose, is impossibility or impracticability. In those cases it is the actual performance of the contract that is impossible rather than the purpose of the contract.
Thinking about the parade case discussed above, imagine the parade occurred but the apartment building had a huge pipe burst. If the rented apartment was completely flooded and unsafe to be in, it would be impossible to watch the parade from it.
To prove impossibility in court, you must be able to show the occurrence of a supervening event, the non-occurrence of which was a basic assumption on which both parties made the contract. Once again, this is very contract and fact-specific, so what is impossible in one situation may not be impossible in another.
Interestingly enough, a common example of impossibility is a port that is closed due to a quarantine, which prevents goods from being delivered on time. However, this example has not persuaded courts that COVID-19 made every breach that has occurred since March 2020 excusable.
What’s Happening in the Courts?
A year ago, we checked in to see if our prediction of increasing numbers of frustration of purpose and impossibility cases held up. We highlighted a number of different frustration of purpose cases, but found that courts were not as keen on the impossibility defense — despite the Restatement mentioning quarantine restrictions as an example.
Now that another year has passed, we thought it would be good to check in again.
COVID Frays the Law of Fashion
In New York, luxury fashion brand Valentino sought legal assistance breaking the multi-year lease it had for its flagship store on Fifth Avenue. The company argued “the current social and economic climate, filled with COVID-19-related restrictions, social distancing measures, a lack of consumer confidence and a prevailing fear of patronizing, in-person, ‘non-essential’ luxury retail boutiques,” prevented them from doing business. Valentino claimed impossibility of performance and frustration of purpose, emphasizing their inability “to offer in-boutique retail sales, or associated services such as fittings,” which luxury brand shoppers expect.
The trial court dismissed the case after finding that the underlying lease included language protecting the lessor if state law prevented Valentino from operating as desired. It was a risk that Valentino had agreed to.
The appellate court agreed, holding:
frustration of purpose is not implicated by temporary governmental restrictions on in-person operations, as the parties’ respective duties were to pay rent in exchange for occupying the leased premises, and plaintiff acknowledged that it was open for curbside retail services…The doctrine of impossibility is also inapplicable here. Impossibility ‘excuses a party’s performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible.’ Here, the pandemic, while continuing to be ‘disruptive for many businesses,’ did not render plaintiff’s performance impossible, even if its ability to provide a luxury experience was rendered more difficult, because the leased premises were not destroyed. [citations omitted]
What is important to note here is the court’s focus on the terms on the lease and the specific facts of the case. The judges didn’t tear up the contract just because we are in a pandemic.
A case with similar facts could come out differently depending on the terms of the lease. And in a situation with a similar lease but different facts, things could also turn out differently.
A Breach is Still a Breach
A case out of Las Vegas involving the popular DJ “Kaskade” and a nightclub called “KAOS” is a good reminder that a frustration of purpose or impossibility defense is not a magic bullet. The nightclub canceled a bunch of events the DJ was supposed to perform at in 2019, and was then unable to reschedule them, and canceled even more performances in 2020, because of the pandemic. The club refused to pay the DJ because events were not held, despite contracting otherwise. The court reminded the nightclub that post-breach events do not excuse the breach.
Although the court in the nightclub case didn’t discuss this, now is also a good time to note that financial difficulties are not a defense, and are generally not considered a frustration of purpose or impossibility. Whether this principle holds up as financial difficulties causes by the pandemic are worsened by inflation is something the Dressel/Malikschmitt team will keep an eye on.
College Students File Suit
Earlier this year, the New Jersey courts approved a settlement reached in the class action lawsuit filed against Rutgers on behalf of students who did not get the college experience they expected because of the pandemic. Rutgers agreed to pay $5 million to settle the suit, which works out to around $50 per student in the class action.
A large number of similar lawsuits have been filed across the country. Most schools have done as Rutgers did and settled the suits against them after a court in Florida ruled that immediate dismissal of such a suit was inappropriate, and allowed discovery on the contracts signed by students and the treatment of students. The court was unwilling to say that frustration of purpose or impossibility were appropriate breach defenses just because of the pandemic, and that motivated many other schools to settle their own lawsuits.
Most contract breach cases settle outside of court. It is even possible to settle before a lawsuit is filed so the dispute remains private.
Living in Interesting Times
Uncertainty is the new normal and New Jerseyans must prepare as best they can. At Dressel/Malikschmitt, we are carefully drafting new contracts that protect our clients’ interests if a breach occurs. Our experienced team of attorneys are also here to assist New Jerseyans who are in a dispute over a breached contract.
If you have questions or concerns about a contract or breach, we urge you to contact us so we can get an overview of your specific situation and counsel you appropriately. The information above is a summary of this complex area of law, and should not be considered legal advice. Outcomes in these cases vary widely based on the facts involved and the language in the underlying contract, so it is important to discuss your case with an attorney.