CONTRACTS AND COVID-19: DEFENDING NONPERFORMANCE WITH FRUSTRATED PURPOSE AS A SHIELD

By: Brice Michka, Volume 105 Staff Member

 As the United States trudged through the most grueling months of the COVID-19 pandemic, countless contracts were affected. Many sporting organizations, including the National Basketball Association, Kentucky Derby, NASCAR, Indianapolis 500, Major League Soccer, National Hockey League, and others, changed their seasons drastically through postponement or cancellation.[1] Many musical events, like the Foo Fighters’ Van Tour 2020,[2] Kenney Chesney’s Chillaxification Tour,[3] and others also pushed off their tours in light of the current pandemic.[4] Without any fans (or far fewer fans) able to attend, these alterations to planned events indirectly raise a question within the realm of contract law about the “frustration of purpose” doctrine.

This Post will engage an analysis of the frustration of purpose doctrine as applied during the COVID-19 pandemic. It will first explain the doctrine, and then it will discuss a few examples of its applicability through evidence in case law. This Post proceeds to analyze the doctrine’s potential role in a hypothetical set against the context of real-world events. Finally, this Post considers when and why the frustration defense fails and succeeds in the COVID era.

I. FRUSTRATION OF PURPOSE: A BRIEF HISTORY AND NOW

 Frustration of purpose is a defense to contract enforcement for nonperformance.[5] A more thorough definition is set out in Restatement (Second) of Contracts at § 265:

Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.[6]

The elements require to prove frustration of purpose are similar to the impracticability doctrine found in contract law.[7] On the other hand, frustration of purpose is not the same as impossibility to perform.[8] The applicability of the three doctrines, impracticability, impossibility, and frustration of purpose, however, similarly arises when there is an unforeseen circumstance that occurs between the formation and the performance.[9]

The famous landmark case of frustrated purpose is Krell v. Henry.[10] Though an English case from over one-hundred fifteen years ago,[11] it provides a nice example of the doctrine of frustration of purpose. The defendant agreed to rent the plaintiff’s apartment for certain dates to watch the coronation parade for Edward VII and Alexandra, his wife.[12] Edward VII fell ill and was unable to proceed with the coronation on the dates the defendant had contracted to rent.[13] Though the contract said nothing expressly about the purpose for the rental, the court found that the defendant was relieved of his duty to pay the plaintiff since his purpose for renting was frustrated.[14]

In Minnesota, the frustration of purpose doctrine is laid out in City of Savage v. Formanek.[15] The court set out the three requirements for a successful affirmative defense: “1. [t]he party’s principal purpose in making the contract is frustrated; 2. without that party’s fault; 3. by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made.”[16]

In the context of COVID-19, few decisions have surfaced that draw any ties to the frustration of purpose doctrine.

II. FRUSTRATION OF PURPOSE DOCTRINE’S POTENTIAL APPLICATION DURING THE COVID-19 PANDEMIC

Imagine a hypothetical in which a family plans to travel to Bloomington, Minnesota on March 20, 2020 with the intention of going solely to the Mall of America. They booked their nonrefundable airline tickets and a hotel stay before the COVID-19 pandemic broke out on the world stage. The family loves shopping and eating out at restaurants and has planned their trip to involve eating only at restaurants and going shopping at the stores in the Mall of America for two days. They will stay nearby and only travel to and from the Mall of America, since the Valleyfair theme park in nearby Shakopee is not open in the early portion of the year.[17] Then, they will leave for home.

On March 17, 2020, the Mall of America closed its doors to the public and planned to stay closed through the end of March.[18] The family wishes to cancel their travel plans but the airline and hotel with which they have contracted do not wish to issue refunds. On its face, this arguably operates as a case that justifies use of the affirmative defense of frustration of purpose. This hypothetical directs us back to City of Savage and its three-part test.

First, the “principal purpose” must be frustrated.[19] As the family planned to do nothing else during their trip to Minnesota, the entire purpose of their trip seems to have fallen through. The family now turns to pre-booked hotel and flights. They ask themselves why they would pay for the hotel booking and airline tickets when their plans already fell apart.

Neither the City of Savage[20] test for frustration of purpose nor the Restatement (Second) of Contracts § 265[21] mention anything about requiring the “principal purpose” be written into the contract. The Eighth Circuit has also interpreted the law to not require the contract to speak about the purpose but has instead relied on extrinsic evidence in concluding the “principal purpose.”[22] Further, it has quoted a line of analysis as set down in Krell:

I think that you first have to ascertain, not necessarily from the terms of the contract, but, if required, from necessary inferences, drawn from surrounding circumstances recognised by both contracting parties, what is the substance of the contract, and then to ask the question whether that substantial contract needs for its foundation the assumption of the existence of a particular state of things.[23]

City of Savage does define “principal purpose” with the help of the Restatement and so finds “[t]he principal purpose: ‘[m]ust be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense.’”[24] A question of fact could arise here as to whether both parties “understand,” since few people are likely to share their plans and purpose for travel with a hotel front desk attendant upon purchase of a few nights stay or the computer screen from which they purchase plane tickets. With that reasoning on the table, the frustration of purpose argument likely fails here.

Continuing to the second prong, however, the frustration of the principal purpose must not be caused by the party accessing the affirmative defense, [25] the family in this case. It would be impossible to argue the family caused the COVID-19 pandemic or the Mall of America’s closing.

Lastly, the principal purpose must be frustrated “by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made.”[26] Again, it would be nearly impossible to predict that a worldwide pandemic would hinder the economy’s—specifically the travel and leisure industries’—operations.[27]

With the aforementioned three elements in mind, it appears that the second and third prongs are easily met. The first, however, would prove more difficult, mainly because of the failure by the hotel and airline to understand the family’s principal purpose in traveling to Bloomington, Minnesota.

If frustration of purpose were to act as a remedy, the family’s remedy could go something like this: They cancel their hotel and plane ticket (i.e. they do not perform under the two contracts). In this first step, the airline and hotel likely already have the family’s money. That means that the family will need to ask for their payment back, which could endure some cancellation fee or be entirely refused. This could pose a problem since the frustration of purpose doctrine is a defense and not a claim. If the family is not on the defending side, then arguing frustrated purpose would not operate as a valid claim.[28] On the other hand, if the family had not yet paid for either the hotel or airline ticket, the defense would likely remain viable. This could occur if the family agreed to pay a smaller airline on the day of the flight or the hotel upon arrival.

Imagine, similarly, that someone had a job placement opportunity in Minnesota, where they rented an apartment specifically to stay and work in-person, but the job was cancelled or moved entirely online. Another situation could arise for folks who booked tickets to come see their favorite sports team or musical artist, but the event was cancelled or postponed. These situations, including the family’s travel to the Mall of America, would look much different if they also had other plans during their travel and had been paid for in advance. For instance, if the family from the first hypothetical were to come to Minnesota with the plans of going to the Mall of America, Valleyfair, and the North Shore, then their “principal purpose” would likely not be deemed frustrated if only the Mall of America and Valleyfair closed. The fact that they remain able to visit the North Shore[29] and other local activities may serve to refute frustration of purpose, the very existence of which could provide an alternative purpose for the trip.[30]

In National Recruiters, Inc. v. Toro Co., where a company attempted to escape hiring an employee for a specific position, the Court found the following as evidence against the purpose being frustrated: “[the company] presented no testimony explaining why [the employee’s] skills could not be use in other positions within the company.”[31] Likewise, the family may have other avenues for making use of their trip.[32] Krell offers little guidance here, since the room rented in that case was only rented during the day.[33] That means that the rental was not analogous to a modern hotel rental but truly was usable only for the sightseeing of the coronation procession during the day and included a room that must have overseen what otherwise was an ordinary street of London.[34]

Returning to the first prong of the City of Savage test, it seems that the family sharing the principal purpose with a representative of the hotel or airline company becomes critical. The Eighth Circuit follows the rule of agency law that says, “the knowledge of the agent is imputed to the principal . . . .”[35] Therefore, the employee, acting as the agent, to whom the principal purpose of the family’s travel is disclosed, would be imputed to its principal, the hotel or airline company, the knowledge of which it learned.

III. LIKELY FAILURE OF FRUSTRATION OF PURPOSE AFFIRMATIVE DEFENSE

In the fast-paced world of twenty-first century commerce, an underlying “principal purpose” is unlikely to be something understood by both parties at the time of a transaction, which today probably takes place online. Our hypothetical thus likely fails at the first prong set out by City of Savage, requiring that “[b]oth parties must have understood the purpose of the contract . . . .”[36] In the quintessential case, Krell, the renter of the apartment knew the purpose for the rental even though it was not expressly written, as it must have been absolutely clear from the context.[37] In the event that our family, or some real-world party in a similar situation, did share its principal purpose for traveling with a representative of the hotel or airline company, then the frustration of purpose affirmative defense may remain preserved.[38] So, picking up the phone and calling to reserve your hotel room or airline tickets, while explaining your purpose for traveling, could keep open the door to later claiming a frustrated purpose. Even then, however, the fact that payment may have already occurred makes the defense of frustration of purpose worth little value to a future plaintiff since the party seeking reimbursement, that plaintiff, would need a claim rather than a defense.

[1] A List of What’s Been Canceled Because of the Coronavirus, N.Y. Times (Apr. 1, 2020), https://www.nytimes.com/article/cancelled-events-coronavirus.html [https://perma.cc/LQS8-539T].

[2] Annie Martin, Foo Fighter Cancel ‘Van’ Tourt Due to COVID-19 Pandemic, United Press Int’l (Aug. 7, 2020), https://www.upi.com/Entertainment_News/Music/2020/08/07/Foo-Fighters-cancel-Van-tour-due-to-COVID-19-pandemic/5261596817470/ [https://perma.cc/L3HN-U9KQ].

[3] Peter Lane Taylor, Kenny Chesney Just Postponed His 2020 Chillaxification Tour: COVID-19 Derails One of Summertime’s Enduring Rituals, Forbes (May 15, 2020), https://www.forbes.com/sites/petertaylor/2020/05/15/covid-19-just-killed-kenny-chesneys-2020-chillaxification-tour-country-music-can-officially-say-goodbye-to-summertime/#506fd2116030 [https://perma.cc/T9ZT-C548].

[4] See generally Here Are All the Major Music Events Canceled Due to Coronavirus (Updating), Billboard (Aug. 24, 2020), https://www.billboard.com/articles/business/touring/9323647/concerts-canceled-coronavirus-list [https://perma.cc/YDN6-LLCV].

[5] See, e.g., Is Your Business Bound to Its Contracts During a Pandemic? Contractual Obligations and Defenses in the Era of COVID-19, Fafinski Mark & Johnson (Apr. 2020), https://www.fmjlaw.com/contract-obligations-covid-19/ [https://perma.cc/QU7D-26YJ].

[6] Restatement (Second) of Contracts § 265 (Am. L. Inst. 1981).

[7] Charles L. Knapp, Nathan M. Crystal, & Harry G. Prince, Problems in Contract Law: Cases and Materials 752 n. 1 (9th ed. 2019) (noting that the elements between impracticability and frustration of purpose doctrine are “nearly identical.”).

[8] Cf. 30 Samuel Williston & Richard A. Lord, Williston on Contracts § 77:95 (4th ed. 2004) (“Impossibility of performance, as a ground for rescission of a contract, refers to those factual situations where one party to a contract finds that the purposes for which a contract was made have become impossible to perform on one side.”). The performance cannot merely be difficult or impracticable to perform. Id.

[9] Knapp et al., supra note 7, at 741–42.

[10] See Krell v. Henry (1903) 2 KB 740.

[11] See id.

[12] Id. at 740.

[13] Id.

[14] Id.

[15] City of Savage v. Formanek, 459 N.W.2d 173, 176 (Minn. Ct. App. 2004) (citing Nat’l Recruiters, Inc. v. Toro Co., 343 N.W.2d 704, 707 (Minn. Ct. App. 1984)). The court in City of Savage also referenced the Restatement (Second) of Contracts § 265 throughout the decision. Id. at 176, 177.

[16] Id. at 176.

[17] Kelsey Bailey, What’s New in 2019?, Valleyfair (Apr. 11, 2019), https://www.valleyfair.com/blog/2019/april/whats-new-in-2019 [https://perma.cc/NUC7-PKT8].

[18] Steve Karnowski, Mall of America Closes as Minnesota Fights Against COVID-19, U.S. News (Mar. 17, 2020), https://www.usnews.com/news/best-states/minnesota/articles/2020-03-17/house-provides-200-million-for-dealing-with-coronavirus [https://perma.cc/64KB-ZTZQ].

[19] City of Savage, 459 N.W.2d at 176.

[20] See generally id.

[21] Restatement (Second) of Contracts § 265 (Am. L. Inst. 1981).

[22] Pieper, Inc. v. Land O’Lakes Farmland Feed, LLC, 390 F.3d 1062, 1066 (citing Henry v. Krell and saying where the contract “did not refer explicitly to the coronation, but the court nonetheless inferred the principal purpose had been frustrated.”).

[23] Id. at 1066 (quoting Krell v. Henry (1903) 2 KB 740 at 749).

[24] City of Savage, 459 N.W.2d at 176 (quoting Restatement (Second) of Contracts § 265 cmt. a (Am. L. Inst. 1981)).

[25] See City of Savage, 459 N.W.2d at 176.

[26] E.g., id.; Restatement (Second) of Contracts § 265 (Am. L. Inst. 1981).

[27] For a discussion of the damage done to the travel industry, see, e.g., Elizabeth Becker, How Hard Will the Coronavirus Hit the Travel Industry?, Nat’l Geographic (Apr. 2, 2020), https://www.nationalgeographic.com/travel/2020/04/how-coronavirus-is-impacting-the-travel-industry/ [https://perma.cc/9A5U-SS7M].

[28] If the family has already paid, they may need to bring a claim similar to disgorgement. Disgorgement is defined as “[t]he act of giving up something (such as profits illegally obtained) on demand or by legal compulsion.” Disgorgement, Black’s Law Dictionary (11th ed. 2019).

[29] For a mile-by-mile sightseeing guide of the North Shore, see North Short by the Mile, Midwest Weekends, https://midwestweekends.com/plan_a_trip/regions/north_minnesota/trip_planning_north_shore_minnesota.html (last updated Apr. 2020) [https://perma.cc/HVV9-WMBC].

[30] See Nat’l Recruiters, Inc. v. Toro Co., 343 N.W.2d 704, 708 (Minn. Ct. App. 1984).

[31] See id. (emphasis added).

[32] See id.; see also Black’s Law Dictionary, supra note 28.

[33] Krell v. Henry (1903) 2 KB 740 at 741.

[34] See id. at 740

[35] Schmitt v. FMA All., 398 F.3d 995 (8th Cir. 2005) (citing S.O.G.-San Ore-Gardner v. Mo. Pac. R.R. Co., 658 F.2d 562, 567 (8th Cir. 1981)).

[36] Christine Mathias, Coronavirus and Business Contracts: When Performance Becomes Impossible or Impracticable, Nolo,  https://www.nolo.com/legal-encyclopedia/coronavirus-and-business-contracts-when-performance-becomes-impossible-or-impracticable.html#:~:text=Frustration%20of%20purpose%20refers%20to%20when%20an%20unforeseeable,simply%20lose%20money%20or%20make%20a%20smaller%20profit (last visited Oct. 15, 2020) [https://perma.cc/36EZ-C9HU].

[37] See Krell v. Henry (1903) 2 KB 740 at 748.

[38] See Restatement (Second) of Contracts 265 cmt. a (Am. L. Inst. 1981) (referencing “both parties” when figuring whether a principal purpose was frustrated).