Reed Smith Client Alerts

This is the second bulletin to address the legal implications of COVID-19 on contract performance. Our prior bulletin discussed the potential defenses of force majeure, impossibility/impracticability, and discharge by supervening frustration of purpose in the context of three recent decisions. Additional defenses, however, may also be available where government action taken in response to the pandemic has impeded or prevented performance under the relevant contract.

Governmental regulations or orders

A more specific application of the impracticability doctrine, set forth in Section 264 of the Restatement (Second) of Contracts, will potentially excuse nonperformance of a contract due to the effects of unexpected governmental regulations or orders: “If the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract was made.” In essence, the doctrine applies when the contracting parties had little or no reason to expect that changes in the law would intervene to make performance impossible or impracticable.

An example of the application of the defense is demonstrated in a case from the Second Circuit. The plaintiffs in Organizacion JD Ltda. v. U.S. Department of Justice1 sued two government agencies and two private banks arising from the U.S. government’s seizure of more than $12 million in wire transfers alleged to have involved the proceeds of illegal drug trafficking. The complaint alleged, among other things, that the banks’ failures to process the requested transfers breached various contract duties owed to the plaintiffs. Citing the Restatement (Second) of Contracts, the Second Circuit disagreed and found that the banks could not be liable for any breach of contract “because the intervening government actions in ordering the seizures of the EFTs rendered any enforceable contract impossible to perform.”2

It is important to note that like general impracticability, the government regulation or order defense may be waived if it is not raised in a timely manner.