What happens when unanticipated delays hit an ongoing project, but the contract does not contain a force majeure clause or an escalation clause? There are times when circumstances frustrate performance to the point where giving up may seem like the only option.  The novel coronavirus and COVID-19 pandemic present such circumstances. Frustration of performance, a case-law driven doctrine, may provide some relief.    

1.    Finding Futility

Frustration of performance is a form of rescission and provides legal excuse for not performing contractual obligations.  It is closely related to “impossibility of performance” or “commercial impracticability,” but differs from them in that frustration recognizes that while performance may be possible, it is also pointless, futile.  

2.    Getting Frustrated

Frustration of performance arises when an unanticipated, unforeseeable or unexpected event occurs that the parties assumed would not occur when they entered into the contract.  The party’s principal purpose must be substantially frustrated without fault by that party. The frustrating event must be substantially burdensome and not merely personal at the time the contract was made.  Since courts prefer to enforce contracts as written, application of the frustration defense typically entails a finding that the parties had not allocated risk for the event occurring in their contract. If these conditions are met and unless the language or circumstances of the contract indicate otherwise, frustration will discharge the party’s remaining duties to render performance under the contract. 

Texas courts have recognized three contexts in which frustration may be available as defense: (1) the death or incapacity of a person necessary for performance, (2) the destruction or deterioration of a thing necessary for performance, and (3) a change in the law that prevents a person from performing.

It is easy to visualize how the novel coronavirus and COVID-19 might fit these criteria. A pandemic was not in most contracting party’s expectations in 2018, 2019 or even early 2020.  Most likely, one basic assumption of contracts entered into before December 2019 was that foreign governments would not disrupt supply chains by shutting down entire regions and that our own governments would not restrict employees’ ability to perform their work.  While unlikely, it is possible that the parties foresaw a pandemic and allocated risk for such an event in the contract. A careful review of the contract is necessary and consultation with counsel is advisable in determining whether the circumstances allow frustration of purpose as a defense to performance.

3.   Managing Frustration

The duration of frustration as used in the legal sense matches our everyday use of the term: Frustration can quickly abate or last a long, long time.  An example of temporary frustration would be governmental building inspections that cannot occur due the COVID-19 pandemic, preventing approval of completed work such that the contractor can begin the next phase of construction.  An example of permanent frustration might be a 6-year delay in beginning construction due to governmental reallocation of resources.

4.    Frustrated Yet?

Many circumstances may appear to frustrate performance, but may not rise to the level of frustration as a legal excuse for performance.  Below are a few circumstances courts have considered in determining whether frustration of performance existed.

a. Plenty frustrated

• • • Lessee’s performance frustrated and obligations in lease excused when leased building damaged by fire.  
    • Contractor’s performance frustrated and obligations under manual labor contract excused due to illness; manual labor impliedly requires health and strength. 
    • Lessee’s performance frustrated and duty to pay rent discharged when government regulation prohibited lighting of neon signs, the very items being leased.

b. Not so much 

• • • Obligation to pay contractual alimony not excused simply because it has become economically burdensome.
    • Gas station owner’s knowledge of malfunctioning gas pumps prior to signing contract to purchase station precludes application of frustration of performance.
    • Travel agency’s agreement with cruise line to sell spots on 3 cruises on a specified ship was not frustrated by cruise line’s sale of the ship to a competing company—the ship sailed, the cruises took place and passengers were booked.

The attorneys at GS are available to answer any questions you may have and to assist you in navigating these uncharted waters. Contact us at info@gstexlaw.com.

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