Applicability of the Frustration of Purpose Defense for COVID‑19 Impacts in the Construction Industry

This blog post is the third in a series of eight that summarize the potential impacts of the COVID-19 pandemic on the construction industry, including the potential applicability of typical contract clauses to the impacts, best practices for mitigation of the impacts, and recommendations for avoiding claims related to COVID-19 in future contracts.

This blog post summarizes information published in articles and blog posts by various attorneys and law firms, and the intent is to provide a brief summary that may be beneficial to owners and contractors. This post is not written by attorneys and does not constitute legal advice.

Several authors discuss the potential applicability of performance obligation relief measures external to the contract with respect to COVID-19 impacts in the construction industry. The frustration of purpose common law defense for non-performance, which is similar to the impossibility of performance common law defense, has been cited as a potential relief strategy as discussed below.

In “Dealing with the Construction Impacts of COVID-19,” American Bar Association Newsletters, Spring 2020, Michael A. Stover, Cynthia E. Rodgers-Waire, and Thomas J. Moran of Wright, Constable & Skeen write that the principle of frustration of purpose may be applicable for delays attributed to COVID-19 impacts. They indicate that frustration of purpose is similar to the impossibility defense and applies where “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.”

Similar to the impossibility defense, Stover et al. note that if the contract specifically allocates risk for non-performance due to pandemics, the contract will take precedence over common law. They also stress the importance of documenting the reasons for delay and discuss the importance of a bond guaranteeing the surety the right to choose its method of performance in the event of a contract default.

In “COVID-19 Impacts on Construction Contracts: Legal Arguments For and Against Performance,” JD Supra, 13 September 2021, Laurie Stanziale of Fox Rothschild LLP writes that while frustration of purpose due to unforeseen events is recognized, cost increases alone do not generally justify rescission of the contract. However, Stanziale cites commentary to UCC §2-615 as indicating that increased cost due to unforeseen contingencies or a severe shortage of materials may be contemplated under the clause. Additionally, Stanziale cites a recent decision in Cai Rail, Inc. v. Badger Mining Corporation, 2021 WL 705880 in the Southern District of New York (SDNY) as offering additional insights. This decision cited cases from 1991, 2011, and 2020 indicating that while frustration of purpose due to an unanticipated event can be a defense if the event causes the reasons for the contract to cease to exist, performance being less profitable or even unprofitable is not enough to substantiate this defense. Stanziale indicates that it is not yet fully understood how these cases and theories apply to COVID‑19-related impacts.

Finally, in “COVID-19’s Impact on Construction Contracts – Will Force Majeure Relief or Other Rights be Available?,” 11 February 2020, Emma Schaafsma and Michelle Li of Herbert Smith Freehills note that if there is no express force majeure or equivalent relief in the contract, under English law the English doctrine of frustration of contracts and the Law Reform (Frustrated Contracts) Act 1943 apply. They indicate that proving frustration under English law is not straightforward.

As detailed above, several authors discuss the potential applicability of the frustration of purpose defense as a performance obligation relief measure for COVID-19 impacts in the construction industry. The authors note that contract clauses typically take precedence over common law defenses and that in order for frustration of purpose to be considered, the impacting event must be significant and not render performance merely uneconomical. As always, fully understanding the specifics of the contract and documenting the impacts contemporaneously are key for supporting (or defending against) potential claims.

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