Missouri Court Holds Great Recession Not Sufficient Basis for Commercial Frustration Defense

Parties to contracts, such as banks or contractors, have often been covered by what is known as the “commercial frustration doctrine.”  The doctrine can excuse a party to a contract from his or her performance when a happening, unforeseen by the contracting parties, destroys or nearly destroys the contract’s purpose or the value of such performance – provided the parties did not cause the happening and were unable to avoid its consequences.

However, as seen in a recent Missouri case in which a party attempted to assert the doctrine and avoid payment on a promissory note by claiming the “Great Recession” was an “unforeseen happening,” the doctrine may not be applicable to merely encountering financial difficulties (even if significant).

In Carpenters’ District Council of Greater St. Louis and Vicinity v. Commercial Woodworking & Contracting, Inc., et al, the United States District Court for the Eastern District of Missouri held that the recession was not the type of unanticipated, unforeseen event which qualified for a commercial frustration defense. 2012 WL 1025203 (E.D. Mo. Mar. 26, 2012).

Between April 26, 2004 and May 21, 2007, the Carpenters’ District Council of Greater St. Louis and Vicinity (“Carpenters Union”) made three loans to Commercial Woodworking & Contracting, Inc. and several individuals related to the corporation (“Commercial Woodworking”). The terms of the loan and its repayment were set forth in three promissory notes. Commercial Woodworking failed to repay upon the promissory notes. The Carpenters Union brought suit against Commercial Woodworking for repayment of the amounts remaining on the notes.

Commercial Woodworking argued that they should not be obligated to repay the notes because the promissory notes were commercially frustrated by the recession. In examining this argument, Judge Henry Autrey discussed the commercial frustration defense and its application upon contracts:

“The commercial frustration doctrine excuses performance of contractual obligations when a happening, not foreseen by the contractors, destroys, or nearly destroys, the contracted performance’s value of the contract’s purpose, provided the contractors did not cause the happening and were unable to avoid its consequence. American Laminates, Inc. v. J.S. Latta Co., 980 S.W.2d 12, 19 (Mo.App.1998). Under Missouri law, to preserve the certainty of contracts, courts are to apply this doctrine sparingly—only when its application would not work an extreme hardship. Howard, 556 S.W.2d at 483. As a general matter, if a party to a contract wants its performance to be excused upon the happening of an event arising after the formation of a contract, which event reasonably could be foreseen at the time of contracting, that party must expressly provide for that contingency in the contract, even if that event would render performance impossible, impractical, or commercially-frustrated. See Clean Uniform Co. St. Louis v. Magic Touch Cleaning, Inc. 300 S.W.3d 602, 608 (Mo.App.2009); Minor v. Rush, 216 S.W.3d 210, 213–14 3d (Mo.App.2007); Missouri Dept. of Transp. ex rel. v. Safeco, 97 S .W.3d 21, 35 (Mo.App.2002). See also 30 Richard A. Lord, Williston on Contracts §§ 77:11, 77:54, 77:95 (4th ed.2004); 17A Am.Jur.2d Contracts §§ 653, 659 (2004).”

Further, Judge Autrey noted:

As a general rule, when a party contracts to do “a thing possible to be performed, he will not be excused … because unforeseen difficulties are encountered.” Webb–Boone Paving Co. v. State Highway Comm’n, 351 Mo. 922, 173 S.W.2d 580, 584 (1943) (quoting United States v. Spearin, 248 U.S. 132, 136, 54 Ct.Cl. 187, 39 S.Ct. 59, 63 L.Ed. 166 (1918)). Thus, a party to a contract must perform thereunder “unless performance is rendered impossible by an Act of God, the law, or the other party.” Farmers’ Elec. Coop., Inc. v. Mo. Dep’t of Corr., 977 S.W.2d 266, 271 (Mo. banc 1998). In order for a contingency not resulting in impossibility to excuse performance, the party wishing to be excused must provide for that contingency in the contract. Stein v. Bruce, 366 S.W.2d 732, 734 (Mo.App.1963).

Upon this rationale, Judge Autrey reasoned that Commercial Woodworking’s commercial frustration defense was based not on an impossibility of performance, but rather on an unforeseen difficulty, i.e. the economic recession affecting the Commercial Woodworking’s ability to repay the loans. Such difficulty, Judge Autrey stated, did not excuse their performance under the doctrine because the recession was not an act of God, the law, or the Union.

Carpenters’ District Council represents just one of the many lawsuits originating out of the recession.  As one of the first opinions to address the doctrine and the recession, it is unclear whether this analysis will be adopted by other courts to hold the doctrine of commercial frustration per se inapplicable to contracts affected by the recession or whether the doctrine may still be available to litigants under certain circumstances.

Regardless of how that question is resolved, Carpenters’ District Council demonstrates the need for parties to consider the range of potential events which may affect their ability to perform the contract and clearly address such contingencies before signing off on the next contract or loan.