A COVID-19 Quandary: Does a Force Majeure Clause Displace the Frustration Doctrine?

The frustration (or “frustration of purpose”) doctrine excuses a party from its contractual obligations when an extraordinary event completely undermines its principal purpose in making the deal. Historically, the doctrine has played a marginal role in contract law, as parties very rarely invoked it – and almost always without success. Courts are understandably reluctant to relieve parties from their contracts and will only do so in very unusual cases. Thus, frustration has long been an obscure doctrine, taught in law schools but infrequently litigated in court.

All that changed in 2020, as the COVID-19 pandemic – and government orders to contain it – is precisely the type of extraordinary event that frustration was designed to address. Over the past year, the courts were inundated by a wave of colorable frustration claims, including numerous high-profile and high-stakes lawsuits. Victoria’s Secret, for instance, sued its landlord to avoid paying its monthly rent of $1 million on the ground that the pandemic and related stay-at-home orders frustrated its purpose in leasing space in Manhattan’s Herald Square.

One recurring issue in these suits is whether a force majeure clause – which excuses a party from liability when an uncontrollable event listed in the clause makes a contract’s performance impossible – overrides the common-law frustration doctrine. Because force majeure clauses are prevalent in almost all commercial contracts, if a force majeure clause were to supersede the frustration doctrine, then practically all frustration claims would be rejected, even if they were otherwise meritorious.

Currently, there is a split of authority on this important question. Several frustration claims arising out of COVID-19, including that of Victoria’s Secret, have already been rejected on the ground that a force majeure clause displaces the doctrine.[1] One Massachusetts court, however, has gone the other way and expressly held that a force majeure clause has no effect on a frustration claim.[2] As I explain in a new article (which was written prior to the Massachusetts decision), I believe the latter view is correct: A force majeure clause has no bearing on the frustration doctrine and does not supersede a claim based on it.[3]

The Force Majeure Clause and the Frustration Doctrine

A force majeure clause covers the same ground as and supersedes the common-law impossibility doctrine, a relative of frustration that excuses a party when an extraordinary event renders its contractual performance impossible, through no fault of its own.[4] In other words, when parties include a force majeure clause in a contract, the precise terms of the clause, rather than the common-law doctrine of impossibility, control whether a party should be excused from performing on the grounds that doing so has become impossible.[5]

By contrast, a force majeure clause should not supersede, displace, or override a common-law frustration claim, because frustration is a separate doctrine that speaks to a different issue.[6] That is, a frustration claim is not based on performance being impossible; it is based on the contract being pointless because the counter-performance has become worthless.

In the COVID-19 context, consider a commercial tenant whose store was shuttered due to governmental stay-at-home orders. When claiming frustration, the tenant is not arguing that his performance of paying the rent is literally impossible due to the pandemic. It is not as if the virus has paralyzed his check-writing hand. Rather, the tenant is making a very different argument: He should be excused from paying his rent because the COVID-19 pandemic and related governmental orders rendered the lease worthless to him. Because his claim is focused on the lease losing value – that is, his principal purpose of entering the lease (to operate his store) has been totally undermined by the pandemic – it falls under the category of frustration rather than impossibility.

In short, the frustration doctrine is in no way superseded or displaced by a typical force majeure clause (as evidenced by the many cases that have analyzed frustration claims on their merits despite the presence of a force majeure clause[7]).

COVID-19 Caselaw on Force Majeure and Frustration

Several recent cases arising out of COVID-19 have understandably – but mistakenly – held that a party whose contract includes a force majeure clause cannot assert the frustration doctrine as a ground for being excused from the contract.

The most well-developed of this group is In re CEC Entertainment Inc., a federal bankruptcy case regarding CEC, the operator of the Chuck E. Cheese chain of arcade-pizzerias.[8] In that case, CEC argued that it should be excused from numerous leases on the ground of frustration. Each of its various leases included a force majeure clause, and the court rejected CEC’s claims on the ground that the force majeure clauses “supersede application of the [frustration] doctrine.”[9] In its discussion of CEC’s lease concerning a North Carolina property, the court explained:

CEC argues that both the global pandemic itself and pandemic-related government regulations are frustrating events. However, the force majeure clause . . . supersedes the frustration of purpose doctrine because the parties specifically allocated the risk of unusual governmental regulation. The force majeure clause contemplates unusual government regulations and how they may alter the parties’ performance obligations. The parties specifically agreed [in the force majeure clause] that unusual government regulations shall not relieve CEC’s obligation to pay rent. [T]he exception of payment obligations from the force majeure clause precludes CEC’s reliance on frustration due to the alleged occurrence of a force majeure event.[10]

The court went on to make similar rulings regarding leases in Washington and California.[11]

In re CEC is not alone in holding that a force majeure clause supersedes the frustration doctrine. Rather, it appears to be part of a trend, as numerous COVID-19 frustration cases have been resolved on the same basis, including the Victoria’s Secret case discussed above.[12] These rulings are erroneous, but understandable, given that impossibility and frustration are “twin doctrines.”[13]

The distinction here is a fine one. In In re CEC, the court rejected CEC’s claim of frustration based on restrictive governmental orders “because the parties specifically allocated the risk of unusual governmental regulation” in their force majeure clauses.[14] But this is not quite accurate. The only risk that was allocated in those force majeure clauses was that unusual governmental restrictions would prevent or delay CEC from paying the rent. That is, the force majeure clauses focused on unusual governmental orders making paying rent impossible to some degree. (This could occur, for example, if the government shut down CEC’s bank and froze its account.)

In contrast, by making its frustration claim, CEC argued that pandemic-related governmental restrictions decimated the value of its leases, as it could no longer effectively operate its business out of those spaces – thereby frustrating CEC’s rationale for paying rent. The precipitous decline in the value of CEC’s leases due to governmental restrictions is a separate risk from an inability to pay rent and was not allocated by the force majeure clauses. Hence, CEC should have retained the right to assert a common-law frustration claim based on unusual governmental restrictions. The same is true for the other cases that have followed In re CEC down this path.

At least one case has addressed this issue in the context of COVID-19 and came to what I think is the correct conclusion. The recent Massachusetts decision of UMNV v. Caffé Nero concerned a Boston café that claimed that a pandemic-related state order barring on-premises consumption of food or beverages frustrated the purpose of its lease.[15] The café sought to be excused from paying its rent while the order was in place, and the court granted summary judgment in its favor on the grounds of frustration.[16]

Notably, the lease between UMNV and Caffé Nero included a force majeure clause. As in the cases discussed above, the landlord “insist[ed] that the defense of frustration of purpose is barred by the force majeure [clause],” but, in this instance, the court flatly disagreed.[17] The court’s analysis closely follows the one I set forth above and in my article:

[T]he force majeure provision addresses the risk that performance may become impossible, but does not address the distinct risk that the performance could still be possible even while [the] main purpose of the Lease is frustrated by events not in the parties’ control. . . . [F]rustration of purpose is a different issue [than impossibility], arises under different circumstances, and is not addressed by the force majeure provision.[18]

UMNV v. Caffé Nero thus came to the correct conclusion, in my view. In light of In re CEC, the Victoria’s Secret case, and other cases holding that a force majeure clause overrides the frustration doctrine, UMNV v. Caffé Nero also created a split of authority on this important question. Future cases – and there are many in the pipeline – will have to choose which side to follow.

ENDNOTES

[1] E.g., In re: CEC Entertainment, Inc., No. 20-33162, 2020 WL 7356380, at *3 (Bankr. S.D. Tex. Dec. 14, 2020) (“frustration of purpose does not apply because the force majeure clauses supersede application of the doctrine”); Victoria’s Secret Stores, LLC v. Herald Square Owner LLC, 70 Misc. 3d 1206(A) (N.Y. Sup. Ct. Jan. 7, 2021).

[2] UMNV 205-207 Newbury, LLC v. Caffé Nero Ams. Inc., No. 2084CV01493-BLS2, 2021 WL 956069, at *1, *6-*7 (Mass. Super. Feb. 8, 2021) (“UMNV insists that the defense of frustration of purpose is barred by the force majeure [clause]. The Court disagrees.”).

[3] See, e.g., Rembrandt Enterprises, Inc. v. Dahmes Stainless, Inc., No. C15-4248-LTS, 2017 WL 3929308, at *12-*14 (N.D. Iowa Sept. 7, 2017) (rejecting the argument that “the force majeure clause supersedes . . . frustration of purpose” as not “well-grounded in facts or law”).

[4] In re Hitz Rest. Grp., 616 B.R. 374, 377 (Bankr. N.D. Ill. 2020) (“Force majeure clauses in contracts supersede the common law doctrine of impossibility.”).

[5] Andrew A. Schwartz, Contracts and COVID-19, 73 Stan. L. Rev. Online 48, 49 (2020).

[6] Glenn R. Sewell Sheet Metal, Inc. v. Loverde, 451 P.2d 721, 729 n.13 (1969) (observing that although frustration may “appear to overlap” with impossibility, “[i]t is, however, a separate doctrine”)

[7] See, e.g., Pieper, Inc. v. Land O’Lakes Farmland Feed, LLC, 390 F.3d 1062, 1066 (8th Cir. 2004); Beardslee v. Inflection Energy, LLC, 904 F. Supp. 2d 213, 219-21 (N.D.N.Y. 2012).

[8] In re: CEC Entertainment, Inc, No. 20-33162, 2020 WL 7356380 (Bankr. S.D. Tex. Dec. 14, 2020).

[9] Id. at *3.

[10] Id. at *11 (emphasis supplied).

[11] Id. at *12–*14.

[12] See, e.g., Victoria’s Secret Stores, LLC v. Herald Square Owner LLC, 70 Misc. 3d 1206(A) (N.Y. Sup. Ct. Jan. 7, 2021); University Square San Antonio, Tx. LLC v. Mega Furniture Dezavala, LLC, Index #E2020003170 (N.Y. Sup. Ct. Monroe Cty. Oct. 22, 2020).

[13] E. Allen Farnsworth et al., Cases on Contracts 856 (7th ed. 2008).

[14] In re: CEC Entertainment, Inc, No. 20-33162, 2020 WL 7356380, at *3 (Bankr. S.D. Tex. Dec. 14, 2020).

[15] UMNV 205-207 Newbury, LLC v. Caffé Nero Ams. Inc., No. 2084CV01493-BLS2, 2021 WL 956069, at *1 (Mass. Super. Feb. 8, 2021).

[16] Id.

[17] Id. at *6.

[18] Id. (emphasis in original).

This post comes to us from Professor Andrew A. Schwartz at the University of Colorado Law School.  It is based on one portion of his recent article, “Frustration, the MAC Clause, and COVID-19,” available here.

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