Error 'Can't perform lookup due to field encryption or a querying error' in CPQ Lookup Field

The first time a user interacts with a lookup field in the Quote Line Editor, a SOQL query is performed in the background. The purpose of this query is to retrieve the 5 most recently viewed records from the lookup object for quick access and selection before running the full search and opening the lookup data popup.

To find those most recently viewed records, the query leverages the LastViewedDate field. This field only exists on objects that have a Custom Tab in Salesforce. See this Knowledge Article: Use LastReferencedData and LastViewedDate fields in a SOQL query

To resolve the error a custom tab must be created for the object. For steps on how to create a tab follow the details in this article: Create a Custom Object Tab

Note: Some Standard Objects (e.g. Address) are not available for use as a lookup field in QLE field set due to field API version and managed package API version mismatch. E.g.: if 'LastViewedDate' field on a Standard object is introduced in API version 63, while the package API version is 57, the QLE won't be able to recognize the field while executing the background query.