Contract Obligations in Uncertain Times

Contract Obligations in Uncertain Times

In these difficult times when our nation and the world is confronted with the COVID-19 crisis, condominium associations may have concerns about contract obligations. Are contractors required to make repairs under existing contracts? Are landscapers required to fulfil their contracts to maintain the condominium grounds? Are condominium associations required to make payments that are due under their contracts? The answer is, “it depends.” Ordinarily, contracting parties are expected to perform their obligations regardless of inconvenience or hardship. Nonetheless, the law may excuse performance where a contract contains a “force majeure” clause. Even where such a clause is not in a contract, under rare circumstances, Massachusetts law may excuse performance under what are known as the doctrines of “impossibility” and “frustration of purpose.”

Are contractors required to make repairs under existing contracts? Are landscapers required to fulfil their contracts to maintain the condominium grounds? Are condominium associations required to make payments that are due under their contracts?

Various types of contracts contain force majeure clauses. Literally translated, force majeure is French for “superior force.” The term is commonly understood to mean an “act of god”—for example, an earthquake or hurricane—for which no person can be held accountable. The term can also be more broadly used to include human actions, such as acts of war. A force majeure clause may be triggered where a natural or other unavoidable disaster or event prevents a party from fulfilling its contractual obligations. Generally, to qualify as a force majeure, the circumstance must be unforeseeable, unavoidable, and not the fault of the party seeking protection from the force majeure clause. But not all force majeure clauses are alike. Whether a party to a contract is excused from performing will depend on how force majeure is defined in the contract and the circumstances under which a party failed to perform. Under Massachusetts law, the meaning of force majeure is interpreted in the context of the entire contract, not just the force majeure clause itself.

An interesting case in point is Baetjer v. New England Alcohol Co., 319 Mass. 592 (1946). The plaintiff, Baetjer, was a molasses distributor located in Puerto Rico. The defendant, New England Alcohol Co. (“NEAC”), located in Everett, Massachusetts, was a producer of industrial ethyl alcohol. NEAC’s alcohol production required vast quantities of molasses. In April 1942—four months after the United States formally entered World War II—the parties entered into a contract by which Baetjer agreed to deliver 2.5 million gallons of molasses during that calendar year. The transaction was to be made in as much as five separate shipments on tankers hired by NEAC that would take delivery of the molasses while docked in Puerto Rico. The parties agreed to a lump sum price of about $250,000 to be paid in full by August 31, 1942. In early April, the first tanker hired by NEAC took delivery of over 400,000 gallons of molasses. One day later, while at sea, the loaded tanker was sunk by an enemy submarine. Despite NEAC’s due diligence, it could not arrange for additional shipments due to wartime conditions, including the ever-present threat from submarines and a shortage of tankers. NEAC failed to make payments to Baetjer by the August 31 deadline. Ultimately, in 1944, NEAC succeeded in taking delivery of the remainder of the molasses, and it paid the full contract price to Baetjer. Baetjer then filed suit, claiming it was entitled to recover late payment interest as provided under the contract with NEAC. In its defense, NEAC argued it was not required to pay interest because the contract’s force majeure clause excused performance for acts beyond the parties’ control.

In deciding the Baetjer case, the Massachusetts Supreme Judicial Court interpreted the force majeure clause in the context of the other terms of the contract, including a provision contemplating possible temporary interruptions caused by war. The Court noted that “when [NEAC] contracted to take the molasses in its vessels it doubtless hoped for and may have expected the best, but it also knew the worst and . . . took the risk.” The Court ruled that the force majeure clause did not excuse NEAC’s late payment, and it ordered NEAC to pay the interest. The lesson taught by the Baetjer decision is that the availability of a force majeure clause as a defense for nonperformance under a contract depends on consideration of all the terms of the contract as applied to all the circumstances surrounding nonperformance.

Even where a contract does not contain a force majeure clause, Massachusetts law may provide a defense if it is impossible for a party to perform contractual obligations. Under the impossibility doctrine, if it appears from the nature of a contract that the parties anticipated “the continued existence of some specified thing as the foundation of what was to be done,” and performance becomes impossible due to the “accidental perishing of the thing without the fault of either party,” performance under the contract could be excused. Boston Plate & Window Glass Co. v. John Bowen Co., 335 Mass. 697, 700 (1957). In other words, the impossibility doctrine might apply where a contract is based on the parties’ assumption that is essential to the contract but does not exist, through no fault of the parties, when it is time to perform.

The impossibility doctrine is not exclusively a defense to a breach of contract claim. In appropriate circumstances, the impossibility doctrine can also be invoked by a plaintiff. In Bowser v. Chalifour, 334 Mass. 348 (1956), Bowser successfully relied on the impossibility doctrine in making a claim for reimbursement of a payment advanced to his commercial landlord. Bowser was a promoter of professional wrestling and other sporting events in Salem, Massachusetts. He entered into a lease for a property known as the North Street Arena. Four years later, under a supplemental agreement with the landlord and the defendant, Chalifour, Bowser paid the $3,515 to cover half the costs of repairs ordered by a state public safety building inspector. The parties agreed that Chalifour, the expected future landlord, would reimburse Bowser for the payment. The parties were subsequently notified that the Commonwealth had taken the entire premises by eminent domain. Consequently, Chalifour never took possession of the property and could not perform his obligations as landlord under the supplemental agreement. Chalifour also failed to reimburse Bowser for the $3,515 payment, and in response Bowser filed suit. On appeal, the Massachusetts Supreme Judicial Court ruled in Bowser’s favor under the impossibility doctrine. The Court reasoned that “this is a case where the taking of the premises by the Commonwealth made the performance of the obligations by Chalifour impossible. In these circumstances [Bowser] is entitled to the return of what he paid under the supplemental agreement when the purpose for which he paid became impossible of performance through no fault of any of the parties.” In sum, the parties formed the supplemental agreement with the assumption of essential facts – that the North Street Arena and the improvements for which Bowser paid would continue to be available to Bowser for leasing under Chalifour’s ownership—but those assumptions did not exist when it came time for Chalifour to rent to Bowser. Therefore, under the impossibility doctrine, Chalifour was required to reimburse Bowser’s payment because he could not lease the premises to Bowser as promised.

The doctrine of frustration of purpose is a companion to the doctrine of impossibility. Massachusetts follows the Restatement (Second) of Contracts, which recognizes frustration of purpose 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 . . . .” See Chase Precast Corp.v. Paonessa Co., 409 Mass. 371 (1991). In determining whether the doctrine applies to discharge a party’s performance under a contract, the judge must consider the foreseeability of a supervening event, allocation of the risk if the event occurs, and the degree of hardship suffered by the parties. The doctrine does not apply where known risks turn out to a contracting party’s disadvantage. This means that if a party knows or should have known of a risk, that party cannot raise frustration of purpose as an excuse for failure to perform under a contract when the known risky circumstance occurs.

If you have questions concerning nonperformance under a contract, the best practice is to seek advice of legal counsel to consider whether one of the foregoing legal principals apply.

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Thom Aylesworth