Defenses to Performance of COVID-19 Impacted Contracts
A recent decision by an Orange County Superior Court judge confirms the viability of the defenses of impossibility or impracticability of performance of certain COVID-19 impacted contracts, and finds a remedy is reformation of such contracts in accordance with the equities of a particular case.
Balboa Capital Corporation v. Ederra Plastic Surgery, PC, Case No. 30-2020-01144747
(“Ederra”), decided on September 1, 2022, concerned a dispute between Balboa, a national equipment financing company, and Ederra, a Georgia plastic surgery clinic. Ederra (or, Defendant) had leased a laser body fat reduction device financed by Balboa. Defendant kept up with its monthly payments on the lease until March 2020, when its business was forced to shut down by an executive order of the California governor as a “nonessential” business. In response, Ederra requested Balboa to allow a pause in its lease payments until it was allowed to start back up again. Balboa would only agree to a twoweek extension on the loan payments, after which, relying on an acceleration clause in the lease, it demanded full payment of the entire loan. Ederra did not make the requested payment and Balboa led suit for breach of contract.
In its response to the complaint, Ederra raised the defense of impossibility/ impracticability to the breach of contract allegation, contending that it was legally excused from performance of its contractual obligations under the lease during the COVID-19 shutdown between March and June 2020, as it had been prevented from operating its business during that time. e court agreed, holding that the forced shutdown of defendant’s business had made performance of its loan obligations impracticable as the business had not been able to use the leased equipment during that period. Next, the court, acting on the defendant’s affirmative defense of reformation and exercising its equitable powers, ruled that the equipment lease remained valid and enforceable, but that Balboa had improperly accelerated the loan during the shutdown period, and, as such, its acceleration was of no legal effect. e court thus ordered payments under the lease to resume without addition of any intervening interests or penalties.
Utilizing the Defenses of Impossibility, Impracticability, Frustration of Purpose, and Illegality in COVID-19 Impacted Contracts
The Ederra decision is consistent with California precedent and those of other jurisdictions applying the defenses of impossibility, impracticability, illegality, and frustration of purpose to COVID-19 impacted contracts, and exercise of the court’s equitable powers to rescind or reform such contracts based on the specific facts and circumstances of the affected contracts.
With respect to impracticability and impossibility, California merged these two common law doctrines long ago, 1 making clear that impossibility need not mean literal impossibility but could include impracticability due to excessive and unreasonable difficulty or expense of performance. The court cited an example where defendants had contracted to take gravel from plaintiffs land at a certain price, but subsequently found that the gravel, although present, could be taken only at a prohibitive cost.2
Frustration of purpose is another available and viable defense to performance of otherwise valid and enforceable contracts. Courts have explained that excuse and relief under that doctrine is available where a party to a contract finds that its principal purpose is “substantially frustrated without his fault by the occurrence of an event the nonoccurrence of which was a basic assumption on which the contract was made.”3 The California Supreme Court has held that frustration can cover situations where “performance remains possible but the expected value of perfonnance to the party seeking to be excused has been destroyed by a fortuitous event, which supervenes to cause an actual but not literal failure of consideration.”4 Thus “the question in cases involving frustration is whether the equities of the case, considered in the light of sound public policy, require placing the risk of a disruption or complete destruction of the contract equilibrium on defendant or plaintiff under the circumstances of a given case.”5 In the context of the contractual obligations impacted by the COVID-19 pandemic, a party seeking to excuse its performance should be ready to articulate facts and circumstances relating to the impact of the pandemic that frustrated the purpose of the lease or rendered impracticable its ability to meet its contractual obligations.
Other post-COVID-19 court decisions confirm application of the doctrine of frustration to contracts impacted by the pandemic. One such case6 decided in September 2020 concerned a class action lawsuit against Norwegian Air by ticket holders who complained that the airline had breached its contract by failing to carry them to their destinations at the designated times. Norwegian Air defended against the claim, contending that the government travel ban prevented performance of its contracts with its customers. The court agreed and ruled for the defendant under the doctrine of impracticability, stating, “defendant’s contractual obligation to provide carriage for plaintiff and other passengers was discharged because performance was rendered impracticable by the travel ban.”7
Illegality is another well recognized doctrine available for potentially excusing performance of COVID-19 impacted contracts. Illegality, frustration of purpose, and impossibility are codified in the California Civil Code, which provides that “a party is excused from a contractual obligation when performance is prevented or delayed by (1) operation of law or (2) an irresistible or superhuman cause.”8 With respect to the defense of illegality, California’s interpretation of that doctrine has been broad. In one example, an almost century-old case concerned a commercial lease agreement that limited use of the leased property to liquor sales. Following enactrnent of Prohibition in 1919, which rendered sales of alcoholic beverages illegal, plaintiff argued that he was excused from paying any further rents because the purpose of the lease had become frustrated by the law. The California appeal court agreed, holding that the tenant’s further perfonnance had been excused. 9
In another case, 10 which concerned a contract for sale of an agricultural product to the country of Colombia, the buyer refused to make the required payment under the contract when it learned that the government of Colombia, after initially allowing the imports, announced that it would refuse to further issue permits for importation of the product. The court held that the buyer’s performance was excused under the doctrine of frustration because the Colombian government refused to issue the buyer a legal pennit to accept a shipment.
The doctrine of frustration of purpose based on illegality of the performance should thus be applicable to COVID-19 impacted contracts, at least to “non-essential” businesses that were subject to “stay-at-home” orders. In California, the order issued by Governor Newsorn on March 19, 2020, specifically ordered people to stay at home except for essential tasks.11 Excuse of COVID-19 impacted contracts for illegality based on an executive order would be consistent with other decisions of California courts, which have recognized defense of illegality to a contract, rendering it unenforceable, where the performance of the contract would result in violation of an executive order by a U.S. President.12
Despite their viability and potential applicability, a contracting party seeking to excuse its performance of COVID-19 impacted contracts under the defenses of impossibility, impracticability, frustration, or illegality rnust clearly tie its defenses to the impact of COVID-19. One example where the defense did not succeed on that basis concerned a dispute involving a shopping center landlord and a tenant for non-payment of rent.13 The lease included a force rnajeure provision, which excused performance based on unforeseen events and circumstances beyond the reasonable control of the parties.
In its response to the complaint, the tenant contended that the COVI D-19 pandernic qualified as an unforeseen event under the force majeure clause of the contract. The court acknowledged that the pandemic would qualify as an unforeseen event and could excuse performance of the contract if the connection between the pandemic and the defense had been made. The court noted that defendant had failed to show that COVID-19 restrictions had directly impacted its ability to pay rent and thus denied the defense.
As in the Ederra case, in cases where the affected contract is not held to be rescinded or unenforceable for illegality, courts are open to reform the contracts based on their equitable powers. Thus, in another example of the successful application of the cornbination of the defense of impracticability and affirmative defense of reformation, the parties entered into a lease for space that was specifically designated for use as a restaurant, Caffe Nero.14 Following the onset of COVI D-19, and the governor’s stay-athome order, the restaurant was prohibited from offering dine-in services; it was forced to choose between lirniting its services to take-out food or closing. Caffe Nero chose to close and subsequently infonned the lessor that it could not pay rent until it was allowed to reopen for dinein services. The landlord responded by notifying Caffe Nero that it would be in default unless it paid the unpaid rent within five days. Caffe Nero did not do so, leading to a lawsuit by the landlord. The court found that the lessee’s performance under the lease had been excused during the shutdown period, from March to June 2020, under the doctrine of frustration of purpose since the objective of the lease, narnely, offering dine-in services, had been frustrated by the governor’s stay-at-home order. As in the Orange County court’s Ederra decision, the Caffe Nero court ruled that defendant was not in default under the lease.
The related but distinct doctrines of impossibility, impracticability, frustration of purpose, and illegality can operate to excuse performance of certain COVID-19 impacted contracts. However, the party seeking to invoke the doctrines must clearly and convincingly link the restrictions and limitations imposed or caused by the pandemic to its inability to perforrn its contractual obligations. In addition, the party invoking such defenses should seek a remedy of rescission, unenforceability, or reformation that is supported by the equities of its particular facts and circumstances.
(1) See Vernon v. Los Angeles, 45 Cal. 2d 710 (1955).
(3) Maywood Police Officers Ass’n v. City of Maywood, 2016 WL 399780, at *5 (Cal. App. 2016).
(4) Lloyd v. Murphy, 25 Cal. 2d 48, 53-55 (1944).
(6) Daversa-Evdyriadis v. Norwegian Air Shuttle ASA, No. EDCV 20-767-JGB(SPX), 2020 WL 5625740, at *2 (C.D. Cal. Sept. 17, 2020).
(7) Id. at *5.
(8) Cal. Civ. Code§ 1511(1).
(9) Indus. Dev. & Land Co. v.
(10) Johnson v. Atkins, 53 Cal. App. 2d 430 (1942).
(11) Exec. Order N-33-20.
(12) Kashani v. Tsann Kuen China Enter. Co., 118 Cal. App. 4th 531, 532 (2004).
(13) Palm Springs Mile Associates, Ltd. v. Kirkland’s Stores, Inc., 2020 WL 5411353, at *2 (S.D. Fla. 2020).
(14) UMNV 205-207 Newbury, LLC v. Caffe Nero Americas Inc., No. 2084CV01493- BLS2, 2021 WL 956069, at *2 (Mass. Super. Feb. 8, 2021).