Written by David Gross
There is a seldom-used legal doctrine called “frustration of purpose” that provides a party with the ability to walk away from a contract when the purpose of a contract is totally defeated by an unexpected event. This doctrine was first established in English law with a case called Taylor v. Caldwell. In that case, which was decided in 1863, a party contracted to rent a music hall for the performance of a concert. After the contract was signed, but before the concert was set to take place, the music hall burned to the ground. Since the concert could not go forward, Judge Blackburn ruled that the contract had an implied condition that the music hall must be in existence at the time of the concert. Since the concert hall was no longer in existence at the time of the concert, both parties were required to walk away from the contract.
Another example, which is found in the Restatement (Second) of Contracts, is where a person rents out a balcony to watch a parade. Due to the illness of an important parade official, the parade is cancelled. The person does not pay for, or use, the balcony, effectively breaching the contract. However, the parade watcher is not liable for a breach of contract due to the doctrine of frustration of purpose, as the entire purpose of renting the balcony was to enjoy the parade.
This doctrine was quite prevalent in 1919 when the Eighteenth Amendment was passed, making the manufacture, transportation, and sale of alcohol illegal. With the passage of this Constitutional amendment, many establishments had to go out of business, in particular, bars and saloons. If a party rented out a space specifically to operate a bar prior to Prohibition, and where after Prohibition the bar could no longer sell alcohol, case law demonstrated that the purpose of the lease (i.e. to sell alcohol to the public) was frustrated, meaning that the tenant could break the lease without liability.
Now that we are facing a global pandemic as a result of COVID-19, there are a number of circumstances where the doctrine of frustration of purpose will apply. For example, taking the case of Taylor v. Caldwell, one can envision a situation where a music hall or stadium is unavailable because of federal, state, or local mandates. If someone rented out such a venue for a concert or sports event, the doctrine of frustration of purpose will likely result in a finding that no rent need be paid when the venue is unavailable due to an unexpected event. Certainly, a strong argument can be made that closures caused by COVID-19 are certainly unexpected, unanticipated, and unforeseeable.
When considering whether this doctrine may apply to your particular situation, there are a few things to consider. First, when this doctrine has been successfully applied in the past, there has typically been nothing in the contract that discusses what happens if there is an unexpected event, such as a force majeure clause. If the contract specifically sets forth what happens in an unexpected event, the contract language will apply, and not the doctrine, even if there is a legitimate frustration of purpose.
Second, the doctrine only applies as long as the unexpected event frustrates the purpose of the contract. For example, if we again look to the facts of Taylor v. Caldwell, but we assume that the rental of the concert hall was for an entire year, the doctrine of frustration of purpose would only last until the music hall was rebuilt. This is true because once the music hall was again available to hold concerts, the purpose of the contract would no longer be frustrated.
Finally, in order for this doctrine to succeed, the entire purpose of the contract must be frustrated. If the contract provides for a number of things, but only a few of them are frustrated, this doctrine may not apply. Or, if the contract is just hampered or hindered (such as if the arrangement can continue, but is no longer as profitable to one of the parties) that doctrine may not apply to excuse performance. In other words, the doctrine is most applicable when the entire contract simply cannot be performed or no longer makes any sense.
If you find yourself in a situation where your business is closed or operating in a limited capacity due to COVID-19, or if your business is impacted by travel restrictions, you may benefit from the application of the doctrine of frustration of purpose. Of course, every situation is different, and this doctrine is very dependent on the particular facts involved. If you think this doctrine may be available to you it would be prudent to have an attorney consider your specific circumstances. The attorneys at Birch Horton Bittner & Cherot are prepared to discuss your obligations and potential remedies with you.