Believe it or not, it has been more than 3 years since the Commonwealth of Massachusetts declared a state of emergency in light of the onset and rise of the COVID-19 Coronavirus pandemic. As we were all grappling with the day-to-day impacts of the pandemic, many questions arose as to what impacts the pandemic might have on business relationships and legal duties and obligations. At that time, the pandemic shed new light on old legal theories, such as impossibility and impracticability of performance, frustration of purpose, and force majeure. Many wanted to know whether the pandemic and its impacts might excuse existing legal responsibilities under one or more of these types of theories.

Of course, the answer to this question is deeply rooted in the facts and circumstances of a given case. That said, earlier this year, the Massachusetts Supreme Judicial Court issued a decision applying these legal concepts to a situation that arose during the pandemic. A review of the court’s decision leads to two initial takeaways: (1) prevailing on theories of impossibility or impracticability of performance and frustration of purpose can be very difficult; and (2) it is imperative for contracting parties to properly allocate risk in their contracts.

The case arose out of a 2015 asset purchase agreement in which the defendants purchased a cleaning service franchise. The purchase price was payable in three installments over a multi-year period. Other than a specific adjustment clause tied to sales performance numbers in the six month period after closing, there was no financial contingency. The agreement did not contain a force majeure clause.

The defendant-purchaser made the first two payments. However, in 2018, the parties agreed to modify the payment terms and extend the final payment period by an additional four years, up to May of 2022. Two co-owners of the defendant-purchaser agreed to be jointly and severally liable under the amended promissory note. Again, there was no financial contingency and no force majeure clause.

Ultimately, the defendants failed to make payment and defaulted on their payment obligations. The record indicated that the Governor’s Executive Orders had effectively shut down the cleaning service franchise. Even after the Executive Orders were lifted, the cleaning service struggled, as customers were reluctant to allow cleaning crews into their homes. In addition, if a cleaning crew member tested positive, the other crew-mates had to quarantine, creating further adverse impacts.

In these circumstances, the defendants raised the doctrines of impossibility and impracticability of performance as well as frustration of purpose to excuse their nonpayment. The Supreme Judicial Court rejected these arguments and upheld the lower court’s finding that the defendants had materially breached the contract by failing to pay the agreed amounts.

Emphasizing that “[w]e cannot rewrite the contract to cure an oversight or relieve a party from the consequences of the failure to adhere to its plain terms,” the Court surveyed the history of the defendants’ legal theories. Because theories “excusing contractual performance are exceptions” to the general rule enforcing contracts in accordance with their terms, the Court noted that they are “not lightly applied.” The party invoking these doctrines bears a high burden of demonstrating certain specific elements, which the Court concluded were not present in the case.

The record did not include evidence demonstrating that payment was impossible. And the fact that performance of the contract might have become inconvenient or more expensive was not enough. In addition, the cleaning service’s financial performance was not a basic assumption upon which the agreement was made. Absent a financial contingency or force majeure provision, the defendant-purchaser bore the risk that its financial conditions may worsen over time. The Court also did not find sufficient evidence to support a claim that the purpose of the agreement was frustrated so as to excuse the non-payment. In short, although the Court recognized the clear adverse impacts of the pandemic, the Court concluded that the defendants had not met their burden to succeed on any of their legal theories.

The Court specifically did “not foreclose parties from raising the impracticability or frustration of purpose defenses to breach of contract claims arising from the COVID-19 pandemic.” However, contracting parties should not assume that they could easily invoke the legal doctrines discussed in this case.

More recently, at the end of June, 2023, the Massachusetts Appeals Court rejected a tenant’s attempt to invoke frustration of purpose to excuse its non-performance of lease obligations in light of Governor’s pandemic shutdown orders. The Appeals Court stated that “[i]n the context of the COVID-19 pandemic, the vast majority of courts to have considered frustration of purpose have declined to apply the doctrine to temporary business closures caused by government shutdown orders.”

The Supreme Judicial Court case illustrates the power of contracting: had the parties planned for risk contingencies at the contracting stage – such as by negotiating a force majeure provision governing the occurrence of unexpected circumstances – they might have avoided this situation altogether. The importance of thoughtful contract drafting and negotiation cannot be understated. Even for risks that no person could have contemplated at the time of contracting, there are various ways to set the parties’ expectations and attempt to control potential risk at the contract formation stage. Given the uncertainties in construction, contractors should consider contract provisions that not only address ongoing issues relating to the pandemic, but also material escalation and supply chain issues, and risk of loss clauses, among others.