MIAMI BUSINESS LITIGATION: FRUSTRATION OF PURPOSE OR IMPRACTICABILITY MAY EXCUSE PERFORMANCE OF CONTRACTUAL OBLIGATIONS DUE TO PANDEMIC

Contract termination can sometimes be necessary even when there has been no wrongdoing by any party. Unanticipated circumstances for one party can frustrate the purpose of the contract or render performance of a contract impractical. The Mavrick Law Firm’s recent, related article addressed the legal excuse of “impossibility” when contractual obligations become impossible to perform (for example, the COVID-19 related “shelter-in-place” orders which prohibits activities such as the hosting an event in public). This article discusses the similar Florida law defenses of “frustration of purpose” and “impracticability.” Peter Mavrick is a Miami business litigation attorney who represents businesses in breach of contract litigation, non-compete agreement litigation, trade secret litigation, trademark infringment litigation, and other legal disputes federal and state courts and arbitration.

The affirmative defenses of frustration of purpose and impracticability have the common principle that if the risk was foreseeable at the inception of the contract, then these defenses may not be applicable. As Florida’s Fifth District Court of Appeal explained in the case of Genuinely Loving Childcare, LLC v. Bre Mariner Conway Crossings, LLC, 209 So.3d 622 (Fla. 5th DCA 2017), if the intervening event was reasonably foreseeable before entering the contract and could have been controlled by the terms of the contract, Florida courts will not allow a party to excuse its contractual performance and instead hold the party liable for a breach of contract. Unlike the doctrine of impossibility, the contractual duties do not need to be impossible to perform

The “frustration of purpose” legal defense may excuse performance of a contract when the overall purpose of the contract has been frustrated or negated by an unanticipated changed circumstance. . For example, in Hilton Oil Transport v. Oil Transport Co., S.A., 659 So.2d 1141 (Fla. 3d DCA 1995), Florida’s Third District Court of Appeal in Miami held that the doctrine of commercial frustration applied to certain events but not other events that were the subject of the lawsuit, depending on whether the “intervening event” was reasonably foreseeable to the parties and should have been addressed by the contract. The appellate court explained that Hilton Oil Transport (“Hilton”) entered into an agreement for its barge to haul asphalt to Honduras. Hilton employed Oil Transport Co. S.A. (“OTC”) to lease its tugboat to tow Hilton’s barge for part of the voyages. During one of the voyages, the Honduran local government detained the barge and tugboat due to the alleged possibility of the asphalt boiling over onto the shore. About one week later, a severe storm came through and destroyed the barge. OTC filed a lawsuit against Hilton for failure to pay its invoice in breach of their charter agreement. Hilton raised the defense of commercial frustration of the charter agreement. The trial court found in favor of OTC. Hilton appealed and contended that the trial court’s award of the entire sixteen-month charter was in error because its charter was commercially frustrated by both the detention of the barge and tugboat, as well as the subsequent destruction by the storm.

Hilton Oil Transport v. Oil Transport Co., S.A. concluded that the charter was not commercially frustrated by the seizure of the barge and tugboat because it was the result of a commercial dispute with the local port authorities. Hilton defined the standard as follows:

[T]he doctrine of commercial frustration is predicated upon the premise of giving relief in a situation where the parties could not provide themselves by the terms of the contract against the happening of subsequent events, but it does not apply where the intervening event was reasonably foreseeable and could and should have been controlled by provisions of such contract.

Hilton found that, on the one hand, the dispute with local port authorities was reasonably foreseeable and could have been provided for in the charter agreement. On the other hand, Hilton found that the charter was commercially frustrated by the loss of the barge during the storm. As a result, the award in favor of OTC was reduced to the date of the destruction of the barge.

By contrast, the legal defense of impracticability excuses contractual performance based on an unanticipated fact or circumstance that would cause extreme and unreasonable difficulty to perform the contractual obligation. The circumstance must be severe enough to excuse performance of contractual duties, since the duties might still be possible to perform, albeit difficult or costly. Many businesses enter transactions, the performance of which may result in more costs than a party could foresee. A mere increase in costs though is not a barrier to contract enforcement unless the costs are extreme and unreasonable.

In the federal court case of Eastern Air Lines, Inc. v. Gulf Oil Corp., 415 F.Supp. 429 (S.D. Fla. 1975), Eastern Air Lines, Inc. (“Eastern”) entered into an agreement with Gulf Oil Corporation (“Gulf”) for the sale and purchase of jet fuel. Gulf demanded that Eastern agreed to its demand for a price increase or it would shut off Eastern’s supply of jet fuel. Eastern filed a lawsuit against Gulf for an injunction requiring Gulf to perform the contract for the agreed upon prices. Gulf alleged that the contract was not binding because, among other things, it was commercially impracticable due to the energy crises in the middle east. Eastern Air Lines held that “[t]he party undertaking the burden of establishing ‘commercial impracticability’ by reason of allegedly increased raw material costs undertakes the obligation of showing the extent to which he has suffered, or will suffer, losses in performing his contract.” The federal court held that Gulf did not satisfy that burden. In fact, no such hardship was established. On the contrary, Eastern Air Lines found that 1973, the year in which the energy crises began, was Gulf’s best year. The evidence showed that in 1973, Gulf recorded $800 million in net profits after taxes. Eastern Air Lines concluded that the contract was valid and not commercially impracticable.

Peter Mavrick is a Miami business litigation lawyer who has successfully prosecuted and defended breach of contract and other business lawsuits. This article does not serve as a substitute for legal advice tailored to a particular situation.