Customer Won't Pay? Understanding Economic Hardship Defenses in Contract Disputes

Just as referees interpret rules during disputes on the field, courts apply strict legal standards when customers claim economic hardship—and the rules rarely favor non-payment.

What You Need to Know:

• Quick Answer: Economic conditions rarely provide legal excuse for non-payment unless specific contract provisions apply

• Key Takeaway: Courts consistently hold that financial difficulty doesn't excuse contract obligations

• Who's Affected: Any business facing payment disputes with customers claiming hardship

What You Need to Know when a customer won't pay:

• Quick Answer: Economic conditions rarely provide legal excuse for non-payment unless specific contract provisions apply

• Key Takeaway: Courts consistently hold that financial difficulty doesn't excuse contract obligations

• Timeline: Respond within 48-72 hours to maximize recovery chances

• Who's Affected: Any business facing payment disputes with customers claiming hardship

When customers stop paying invoices and claim "economic conditions" as the reason, business owners face a critical question: is this a valid legal defense? Understanding why customers invoke economic hardship defenses and why courts consistently reject them can save your business significant time, money, and preserve valuable relationships.

The Legal Reality of Economic Hardship Claims

Why "The Economy" Isn't a Legal Excuse

When customers claim they can't pay due to economic conditions, business owners often feel torn between sympathy and frustration. The legal system, however, takes a clear position: parties to contracts assume the risk of economic changes.

Despite widespread payment stress in today's economy, courts consistently reject economic hardship as a defense to contract obligations. The fundamental principle: if you could perform when you signed the contract, subsequent financial difficulty doesn't excuse performance.

Massachusetts courts, like most jurisdictions, distinguish between true impossibility (the thing literally cannot be done) and mere impracticability (it's become expensive or difficult). Your customer's financial problems, cash flow issues, or reduced revenues fall squarely into impracticability - which provides no legal defense.

This principle applies even when:

• Market conditions dramatically change

• Input costs skyrocket unexpectedly

• Customer demand evaporates

• Credit markets freeze

• Industry-wide disruptions occur

Courts reason that businesses are sophisticated parties who can anticipate and allocate economic risks through contract terms. If parties could escape obligations whenever business became difficult, commercial contracts would become meaningless.

Force Majeure: The Most Misunderstood Defense

What Force Majeure Actually Covers

"Force majeure" has become the reflexive response to any business disruption, but few understand its actual legal limits. These clauses excuse performance only for specifically listed extraordinary events beyond a party's control - typically "acts of God" like:

• Natural disasters (earthquakes, floods, hurricanes)

• Wars and terrorism

• Government actions prohibiting performance

• Labor strikes (sometimes)

• "Other events beyond reasonable control" (if included)

What Force Majeure Doesn't Cover

Critically, force majeure almost never excuses payment obligations. Money is considered fungible - if you don't have it, you can borrow it. Courts consistently hold that financial inability, even if caused by a force majeure event affecting your business, doesn't excuse payment for goods or services already received.

Even with broad force majeure language, your customer still owes payment for delivered goods or completed services. The clause might excuse their future performance obligations, but not past payment duties.

Burden of Proof Requirements

Customers invoking force majeure must prove:

1. The specific event falls within the clause's exact language

2. The event was unforeseeable at contract signing

3. They took reasonable mitigation steps

4. The event actually prevented (not just hindered) performance

5. They provided required notice (often within specified timeframes)

Missing any element defeats the defense. Courts interpret force majeure narrowly, refusing to expand coverage beyond explicit terms.

Commercial Impracticability Under the UCC

The Legal Standard

Under UCC § 2-615, sellers can claim excuse when performance becomes "commercially impracticable" due to unforeseen circumstances. Buyers sometimes attempt to invoke similar common law doctrines. Either way, the bar is extraordinarily high.

"Impracticable" doesn't mean unprofitable or even severely unprofitable. Courts require showing that performance would result in extreme and unreasonable difficulty, expense, injury, or loss. Examples of what doesn't qualify:

• 50% cost increases

• 100% cost increases

• 300% cost increases (in most cases)

• Loss of anticipated profits

• Need to sell at a loss

• Bankruptcy risk

"Impracticable" doesn't mean unprofitable or even severely unprofitable. Courts require showing that performance would result in extreme and unreasonable difficulty, expense, injury, or loss. Examples of what doesn't qualify:

• 50% cost increases

• 100% cost increases

• 300% cost increases (in most cases)

• Loss of anticipated profits

• Need to sell at a loss

• Bankruptcy risk

In Transatlantic Financing Corp. v. United States, the D.C. Circuit held that performance must be "positively unjust" to excuse obligations, not merely unprofitable. Courts consistently find that severe cost increases alone don't meet this standard.

Why This Defense Usually Fails

Three factors doom most impracticability defenses:

1. Foreseeability: Courts find most economic changes foreseeable by sophisticated business parties

2. Risk allocation: Contracts implicitly allocate normal business risks to the obligated party

3. Degree required: True commercial impossibility, not just severe hardship

Massachusetts courts have rejected impracticability defenses even when businesses faced industry-wide disruptions, unless performance became objectively impossible for anyone, not just the specific defendant.

Frustration of Purpose: The Narrow Exception

When Purpose Matters

Frustration of purpose excuses performance when unforeseen events destroy the contract's fundamental purpose - even if performance remains technically possible. The frustrated purpose must be:

• The principal purpose for both parties

• So completely frustrated that performance would be meaningless

• Due to events neither party assumed the risk of

Classic Examples That Work

• Renting space for a coronation parade that gets cancelled

• Licensing technology for a product later banned by regulation

• Purchasing land for development later prohibited by zoning

Business Disputes That Don't Qualify

• Reduced profitability or losses

• Changed market conditions

• Loss of expected customers

• Increased competition

• General economic downturns

The key: frustration requires the essential purpose to be destroyed, not just made less profitable or advantageous.

The Tactical Reality When A Customer Won't Pay

Despite weak legal merit, customers invoke these defenses strategically to:

• Buy time while scrambling for funds

• Create leverage for payment negotiations

• Complicate litigation increasing your costs

• Generate sympathy from judges or mediators

• Shift blame for business failures

• Preserve relationships by avoiding direct refusal

Understanding these tactics helps craft effective responses that address both legal and business realities.

Red Flags

Certain behaviors indicate strategic default rather than genuine hardship:

Financial Deception Indicators:

• Paying other vendors while claiming inability to pay you

• New equipment or expansion announcements

• Executive bonuses or owner distributions

• Acquiring other businesses

• Lavish spending visible on social media

Asset Dissipation Warnings:

• Bulk inventory sales below market

• Transfers to related entities

• New company formations by principals

• Real estate transfers to insiders

• Closing or moving bank accounts

Critical: If you observe potential fraud or asset dissipation, contact us immediately to preserve remedies.

Important Legal Disclaimers

This information is for educational purposes only and does not constitute legal advice. Chang Law Group is licensed to practice law in Massachusetts only. Laws governing contract defenses and payment obligations vary significantly by jurisdiction, and specific outcomes depend on contract language, applicable law, and unique factual circumstances.

Contract dispute resolution involves complex legal considerations that require individualized analysis. Each situation involves unique contractual terms, factual backgrounds, and legal requirements that demand specialized legal review. Generic information cannot substitute for case-specific legal counsel.

For specific legal questions regarding your contract disputes or customer payment issues, contact Chang Law Group to discuss your situation. Chang Law Group is licensed to practice law in Massachusetts and can assist with contract enforcement and dispute resolution strategies tailored to your business needs.

Sources and Legal Authority

1. Uniform Commercial Code § 2-615 - Excuse by Failure of Presupposed Conditions

2. Transatlantic Financing Corp. v. United States, 363 F.2d 312 (D.C. Cir. 1966)

3. Kel Kim Corp. v. Central Markets, 70 N.Y.2d 900 (1987)

4. Restatement (Second) of Contracts § 261 - Discharge by Supervening Impracticability

Update Schedule: This article may be reviewed quarterly to reflect evolving legal standards and economic conditions affecting contract disputes.