Current Trends in Force Majeure Clauses in the Wake of COVID-19: Frustration of Purpose as an Alternative Argument

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In the wake of COVID-19, litigants have increasingly sought to excuse contractual performance by invoking force majeure clauses. In the early stages of the pandemic, there were few reported decisions on these matters, and the substance of these rulings echoed the principles that were applied in the pre-COVID era: force majeure clauses are strictly and narrowly construed. See, e.g., Lantino v. Clay LLC, 2020 WL 2239957, (S.D.N.Y. May 8, 2020) (rejecting a gym owner’s force majeure/impossibility argument that COVID-19 and the state’s shutdown order destroyed his business and ability to pay because the gym owner established financial difficulty but not a set of circumstances that made performance genuinely impossible).

Other recent opinions, however, have trended toward a more lenient standard. See, e.g., In re Hitz Restaurant Group, No. BR 20 B 05012, 2020 WL 2924523 (Bankr. N.D. Ill. June 3, 2020) (excusing a restaurant owner and tenant’s performance under a lease due to force majeure where the owner argued that Illinois’ stay-at-home order precluded performance and the language in the lease’s force majeure clause that explicitly mentioned “laws and other government action”); Richards Clearview, LLC. v. Bed Bath & Beyond, Inc., 2020 WL 5229494 (E.D. La. September 2, 2020) (excusing a tenant’s failure to pay rent on force majeure grounds, even though the operative force majeure clause did not mention pandemics, COVID-19, or related government shutdowns).

Still, the varying authority on this topic has left litigants uncertain regarding whether they have a viable force majeure argument. But a recent opinion from the Eastern District of New York — Banco Santander (Brasil), S.A. v. American Airlines Inc., No. 20CV3098RPKRER, 2021 WL 4820646, at *3 (E.D.N.Y. October 15, 2021) — suggests that a related argument, “frustration of purpose,” may carry the day, even though it is based on the same facts and circumstances as an unsuccessful force majeure argument.

In Banco Santander, when the COVID-19 pandemic struck, American Airlines (“American”) suspended flights between Brazil and the United States. Prior to the pandemic, however, Banco Santander (“the Bank”) contracted with American to offer a credit card program, co-branded with American. Under the terms of the contract, cardholders would earn miles with their purchases, and the Bank would, in turn, pay American for those miles. But the Bank was required to purchase a minimum number of miles each year — regardless of how many miles cardholders would earn through their spending.

Because of the pandemic, the Bank sought to terminate the contract due to a force majeure event, and, in the alternative, the Bank argued that it should be excused from performance based on the common-law doctrine of frustration of purpose. The Court gave short shrift to the Bank’s force majeure argument. Particularly, it held that while the pandemic could, in theory, qualify as a force majeure event, the parties’ contract foreclosed the application of the doctrine to American because the force majeure provision applied only if American “delays performance or fails to perform due to a Force Majeure Event” for at least 90 days. However, the contract did not state that flying between Brazil and the United States was among the duties expressly assumed by American. Thus, the Bank’s force majeure argument was rejected.

Nonetheless, the Court refused to dismiss the Bank’s claim for frustration of purpose. The Court explained that under New York law, the frustration-of-purpose doctrine permits a party to stop performing under a contract when a “wholly unforeseeable event renders the contract valueless” to that party. Axginc Corp. v. Plaza Automall, Ltd., 759 F. App’x 26, 29 (2d Cir. 2018); cf. PPF Safeguard, LLC v. BCR Safeguard Holding, LLC, 85 A.D.3d 506, 508 (N.Y. App. Div. 2011) (frustration of purpose applies when “a change in circumstances makes one party’s performance virtually worthless to the other, frustrating his purpose in making the contract”). To that end, the Bank essentially realleged its force majeure argument — that the COVID-19 pandemic was an event unforeseen by the parties that both disrupted all air travel worldwide and led American to cease all air travel between the United States and Brazil. The Bank further claimed that the pandemic had a “fundamental” impact on the desirability of air travel between the United States and Brazil because it led to government travel restrictions, reductions in airline capacity, and a general reluctance to travel. Thus, the Bank concluded that the consequences of the unforeseeable global pandemic rendered the contract valueless to the Bank.

Notably, in refusing to dismiss the Bank’s claim, the Court explained that:

[F]airly read, the complaint argues that a confluence of factors stemming from the COVID-19 pandemic rendered the contract valueless — including not just the suspension of flights, Compl. ¶¶ 47-48, but also a broader decimation of air-travel demand, id. ¶ 49. Even if one link in the chain of events on which the bank relies was foreseen by the parties — the suspension of flights — it would be inappropriate to dismiss a frustration-of-purpose claim that also relies in substantial inm part on other, assertedly [sic] unprecedented events.

2021 WL 4820646, at *5. The Court then held that these are plausible factual issues that were not appropriate to resolve on a motion to dismiss.

There are several takeaways from this holding and the evolution of force majeure litigation in a post-pandemic era:

  • Careful attention should be paid to the evolving force majeure/COVID jurisprudence in the relevant jurisdiction.
  • Practitioners should be mindful of both (i) a contract’s force majeure language (namely, whether it identifies COVID-19, pandemics, or government shutdown orders as force majeure events) and (ii) the particular facts and circumstances that led to a client’s frustrated performance, with the understanding that some courts may require a thorough argument demonstrating that performance was not merely frustrated but impossible.
  • Despite the uncertainty of successful force majeure arguments, however, practitioners should consider arguing the common law doctrine of frustration of purpose as an alternative form of relief, as the same facts that constitute an unsuccessful force majeure argument may nonetheless state a viable frustration-of-purpose claim.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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