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Covid, Force Majeure, and Frustration of Purpose – Some Words of Caution

Courts generally show a pattern of skepticism toward force majeure and frustration of purpose arguments stemming from the Covid-19 pandemic. Here’s what businesses need to know to protect themselves.


Courts generally show a pattern of skepticism toward force majeure and frustration of purpose arguments stemming from the Covid-19 pandemic. Here’s what businesses need to know to protect themselves.


Definitions

First, we need to get our terminology straight. Frustration of purpose and force majeure, while related concepts, are distinct in some important ways. Force Majeure is an event mentioned explicitly in a contract that discharges the parties of at least some of their responsibilities. Frustration of purpose, on the other hand, is a contract defense alleging that the basic purpose of the contract being litigated has been frustrated by an event not reasonably foreseeable to the parties. Michigan Courts use a three-part test to assess frustration of purpose: 1) the contract must be at least partially executory; (2) the frustrated party’s purpose in making the contract must have been known to both parties when the contract was made; (3) this purpose must have been basically frustrated by an event not reasonably foreseeable at the time the contract was made, the occurrence of which has not been due to the fault of the frustrated party and the risk of which was not assumed by him. Molnar v. Molnar, 110 Mich. App. 622, 313 N.W.2d 171 (1981).

Primary issues: Causation and Foreseeability.

It’s hard to deny that the COVID-19 pandemic involved possibly the most significant disruption of global commerce since World War II. As of this writing, the WHO reports over six million lives have been lost to COVID-19. Sweeping restrictions on travel and trade across the globe have also come at an enormous and self-evident economic cost. So—why isn’t COVID persuasive as a force majeure or frustration of purpose event?

One issue is causation. It can be challenging to prove that the pandemic caused a disruption when intervening factors like government action come into play.

For example, Michigan saw strict government shutdown mandates related to COVID. Though these shutdowns may have saved numerous lives, they inarguably caused some markets to collapse overnight. Suddenly, college towns were empty; theaters, bowling alleys, and dine-in restaurants were shuttered. Did the pandemic cause this? Or did government action cause it? Alternatively, did a business decline for an entirely different reason? Was it already doomed, with a shutdown being only the final nail in the coffin? The same issue comes up with Covid-related supply chain disruptions. Did the pandemic cause it? Labor shortages and strikes? Both?

In a contract case where the defendant suffered a loss of business amid the COVID pandemic, causation issues might render their force majeure or frustration of purpose defenses ineffective. Whether initiating or defending a lawsuit, a party making a frustration of purpose or force majeure argument has a burden of proof to meet.

Another problem is that COVID-19 and its effects have arguably been foreseeable, negating frustration of purpose and force majeure arguments.

Erin Webb, a legal analyst writing for Bloomberg, noted in a November 2021 article titled ANALYSIS: No Longer Unforeseeable? Force Majeure and Covid-19 that courts have rejected Covid-related force majeure and frustration of purpose arguments on the reasoning that the pandemic and its effects were foreseeable.

“Since early 2021, with Covid-19 the new normal and the coronavirus feeling a lot less’ novel,’ courts have increasingly expected parties to have adjusted to pandemic-related issues—from supply chain disruptions to the challenges of remote work. So, for those still wishing to explore such defenses, careful factual research and analysis early in a case will be more important than ever,” writes Webb.

In short, with the pandemic being in its third year, disruptions related to the pandemic are no longer unforeseeable.

Another older version of this reasoning is that a decline in business, even if resulting from conditions such as a pandemic and stay-at-home order, is an inherent risk of doing business that the parties assume. “The tenant is not relieved from the obligation to pay rent if there is a serviceable use still available consistent with the use provision in the lease. The fact that the use is less valuable or less profitable or even unprofitable does not mean the tenant’s use has been substantially frustrated.” Mel Frank Tool & Supply, Inc. v. Di-Chem Co., 580 N.W.2d 802, 808 (Iowa 1998)

For a frustration of purpose argument to succeed, the entire basic purpose of the contract must be frustrated. This has happened in some cases. See, for example, Bay City Realty, LLC v. Mattress Firm, Inc., No. 20-CV-11498, 2021 WL 1295261 (E.D. Mich. Apr. 7, 2021). The case involved a frustration of purpose defense to the landlord’s breach of contract claim. The court found in favor of the tenant/defendant on the frustration of purpose issue, holding that the Governor’s order shuttering non-essential businesses frustrated the primary purpose of the Lease (retail sales of mattresses).

Force majeure clauses—should we use them for pandemics?

Paula M. Bagger, writing for the American Bar Association, covers this topic in greater detail in a March 2021 article titled The Importance of Force Majeure Clauses in the COVID-19 Era. Bagger warns that “we must not ignore the potential applicability of force majeure to our commercial agreements.”

Possible solutions are not as simple as slapping the word “pandemics” into a force majeure clause. For one, some courts may reason that the parties actually foresaw listed events, even though such reasoning goes somewhat against the logic of a force majeure clause, which lists potential unforeseen events.

Writes Erin Webb: “Some courts have found that the parties’ ability to name a risk—like a pandemic or a government shutdown risk—in a force majeure clause means that the risk was not only foreseeable at the time of contracting, but actually foreseen, defeating other defenses to nonperformance, such as impossibility of performance or frustration of purpose.”

This reasoning may be particularly applicable to Covid-19, given evidence that Covid-19 will be endemic to the human population in the future. If we expect Covid, we can no longer expect to use it as an excuse.

Furthermore, going back to causation, a force majeure clause mentioning a pandemic may not adequately address the issues accompanying the COVID-19 pandemic. More open-ended catch-all-type statements may be better.

However, it is essential to consider one’s own goals when drafting a force majeure clause. For example, if you’re a commercial landlord, you may not want a force majeure clause to encompass pandemics like COVID-19 – it could give a delinquent tenant ammunition in its efforts not to pay you. Conversely, if you’re a commercial tenant, you might want an out if business dries up.

Conclusion

COVID-related frustration of purpose and force majeure are not cure-alls, and courts will not take these arguments at face value. However, with the right facts, frustration of purpose or force majeure arguments can be successful. Businesses should take positive steps to ensure that their interests are protected if/when COVID comes knocking again. For all your business needs regarding frustration of purpose and force majeure clauses, the attorneys at Fraser Trebilcock can help.


Matthew J. Meyerhuber is an attorney at Fraser Trebilcock focusing on general litigation, cannabis law, environmental law, and real estate. Matthew can be reached at mmeyerhuber@fraserlawfirm.com or 517.377.0885.