COVID-19’s effect on contracts governed by Missouri law: Commercial frustration
By Clark Hedger
The COVID-19 pandemic has dramatically impacted businesses large and small. Stay-at-home orders, social distancing guidance from federal, state, and local authorities, and public uncertainty have caused many businesses to close or experience dramatic decreases in revenue. Shutdowns, revenue declines, supply chain disruption, and worker availability notwithstanding, many businesses have continuing financial and performance obligations they are contractually required to meet. But what if they can’t, or claim they can’t?
If a negotiated resolution can’t be reached, a party’s continuing obligation to perform under a contract could be excused in light of the pandemic by (1) the terms of the contract itself, such as a force majeure provision; (2) common law doctrines such as commercial frustration; and (3) code-based doctrines such as commercial impracticability. This article focuses on commercial frustration, a doctrine of general application that can apply to a wide variety of contracts. While the Missouri Supreme Court has not yet formally adopted this doctrine, intermediate Missouri appellate courts and federal courts in Missouri have applied it for the past 40 years, and there is little doubt that it is the law of Missouri.
Stated simply, the doctrine of commercial frustration provides as follows: If the occurrence of an event, not foreseen by the parties and not caused by or under the control of either party, destroys or nearly destroys the value of the performance or the object or purpose of the contract, then the parties are excused from further performance. E.g., Howard v. Nicholson, 556 S.W.2d 477, 481–82 (Mo. Ct. App.1977).
As Missouri favors certainty and predictability in contract interpretation and application, the doctrine should be applied in limited fashion and be reserved for circumstances that “operate to make performance valueless and the allocation of contractual risks capricious or fortuitous.” Id. On this rationale, Missouri courts effectively entertain a presumption against excusing required performance under a contract absent exceptional circumstances.
The COVID-19 pandemic — and its consequences — was not reasonably under the control of any private party. Thus, the doctrine’s application to commercial frustration claims attributable to the pandemic will turn on what the parties to a contract reasonably foresaw, and what the object and purpose of the contract at issue were. The decided cases in Missouri offer some guidance on both these issues.
In determining whether an event was foreseeable, Missouri courts look at the terms of the contract itself and the circumstances surrounding its formation. Applying this test, Missouri courts have found the following events foreseeable:
- for an organization that receives state funding, the possibility that its funding will be reduced or rescinded, Adbar, L.C. v. New Beginnings C-Star, 103 S.W.3d 799, 802 (Mo. Ct. App. 2003);
- structural defects in a 100-year-old building, Adbar, L.C., 103 S.W.3d at 802;
- future action by a tenant to enforce a lease restriction, Shop ‘N Save Warehouse Foods, Inc. v. Soffer, 918 S.W.2d 851, 863 (Mo. Ct. App. 1996);
- crop failures due to weather, infestation, and other causes, Jenson v. Haynes, 633 S.W.2d 154, 157 (Mo. Ct. App. 1982); and
- a change order limiting the scope of work originally contracted for, Werner v. Ashcraft Bloomquist, Inc., 10 S.W.3d 575, 576–77 (Mo. Ct. App. 2000).
On the other hand, Missouri courts have determined that the following events were not foreseeable:
- the bankruptcy of a proposed tenant of a building specifically constructed for the tenant’s use, Nicholson, 556 S.W.2d at 482–83; and
- a trial court’s order transferring custody of children due to spouse’s inability to parent her children, Dutton v. Dutton, 668 S.W.2d 585, 591 (Mo. Ct. App. 1984).
These cases suggest that the foreseeability determination vis-à-vis the COVID-19 pandemic will be driven largely by how a court frames the issue before it. For example, even though businesses of all kinds go into bankruptcy — and bankruptcy is, as a result, necessarily foreseeable as a logical matter — Nicholson concluded that the bankruptcy of a particular business was not foreseeable. Had the court framed the issue differently — e.g., whether bankruptcy of any company is foreseeable — it would have come to the opposite conclusion. Regardless, on Nicholson’s actual holding, one might reasonably argue that while a pandemic is reasonably foreseeable given the many historical examples of pandemics — plague, Spanish flu, cholera, and HIV/AIDS, etc. — the COVID-19 pandemic was not. On the other hand, under Jenson, one might reasonably liken the threat of pandemic to the threat of drought, disease, or pestilence, and on that basis, conclude that COVID-19 was, in fact, foreseeable. These conflicting, reasonable interpretations of Missouri law will provide courts with leeway to frame and decide the foreseeability inquiry consistently with courts’ balancing of the equities of the situation.
Contract purpose or value
On the second prong of the commercial frustration test, courts have held that the purpose or value of a contract has been destroyed in the following circumstances:
- bankruptcy of tenant for whom building was to be constructed, Nicholson, 556 S.W.2d 477, 482–83; and
- child support provisions rendered meaningless given necessary change of custody of children, Dutton, 668 S.W.2d at 591.
On the other hand, courts have found that the purpose or value of a contract was not destroyed in the following circumstances:
- when an event caused the cost of performance to increase substantially, Conlon Grp., Inc. v. City of St. Louis, 980 S.W.2d 37, 41 (Mo. Ct. App. 1998);
- when an event resulted in a decreased profit or a loss under the contract, BancorpSouth Bank v. Hazelwood Logistics Ctr., LLC, 706 F.3d 888, 896–97 (8th Cir. 2013); and
- when an event destroyed a portion but not the entirety of a roof subject to a refurbishment contract, such that the portion of the roof subject to the contract could still be refurbished, Dudley v. St. Regis Corp., 635 F. Supp. 1468, 1471 (E.D. Mo. 1986).
As these cases bear out, application of this second prong will necessarily depend on the terms and subject matter of the particular contract at issue. It is thus difficult to draw generally applicable guideposts from the case law. But, it is reasonably apparent from the decided cases that diminution of profits and/or performance at a loss will not be enough, in and of themselves, to warrant relief under the doctrine.
In short, the doctrine of commercial frustration is one avenue through which performance under a contract might be excused in light of the unprecedented impact of the COVID-19 pandemic. If the COVID-19 pandemic has impacted your company’s ability to perform under an existing contract, or a counterparty’s ability to perform under an existing contract, and you have questions about your options and next steps, please contact Clark Hedger or visit Greensfelder’s COVID-19 resources page.
To read an Illinois-focused take on commercial frustration doctrine, please click here.