Part 2, Force Majeure: Victoria’s Secret and Frustration of Purpose

Admittedly I did not anticipate Victoria’s Secret as the catalyst for another discussion on force majeure and COVID-19; yet again is the old adage proven apt, that truth is stranger than fiction:

As wryly observed by the New York Times, the attempt to scuttle the merger “faces unusually daunting odds, thanks to clever drafting by L Brands’ lawyers at Davis Polk & Wardwell. In the acquisition agreement, the lawyers carved out specific exceptions to those acts of God, including a pandemic. That meant that even if a pandemic struck, Sycamore would be legally obligated to complete the deal.”

What the article highlights is a well-drafted force majeure clause by Victoria’s Secret’s lawyers, specifically that Victoria’s Secret thought to include pandemics. This addresses the issue of foreseeability; whether the virus was a foreseeable risk that the parties should have appropriately allocated in negotiations.

“Corporate lawyers said references to pandemics had started creeping into merger agreements and other contracts around the time of the L Brands-Sycamore deal. By then, it was not hard to imagine that the novel coronavirus that had surfaced in China at the end of last year could cause economic upheaval. The city of Wuhan had already been shut down, and the first case of Covid-19 had been diagnosed in the United States. The virus was clearly spreading globally, with cases already reported in South Korea, the Philippines, Japan and Italy.”

While the suit is pending before the courts, it is certainly noteworthy that Sycamore “concedes that it can’t invoke the ‘material adverse event’ clause to justify terminating the contract, given the language that specifically excludes a pandemic. Nor does the lawsuit fault L Brands for closing its stores, which it did under government orders.” Instead, Sycamore argues that the Victoria’s Secret breached their contract by not following industry practices in respond to COVID-19’s impact, including a failure to pay rent and furloughing employees.

The Victoria’s Secret dispute highlights an unfolding, as-yet-unknown legal grounds vis-à-vis COVID-19: frustration of purpose. As a renowned contracts professor recently explained to me, “frustration of purpose is a doctrine that applies without any clause to that effect; it is designed, in other words, to cover situations where the parties did not specifically and expressly allocate risk. Force majeure clauses are express, and thus may not need to be nearly so limited as frustration of purpose.”

Frustration of purpose is a doctrine that applies without any clause to that effect; it is designed, in other words, to cover situations where the parties did not specifically and expressly allocate risk.

A timely piece from the Wisconsin State Bar elaborates on this. “Even if a contracting party does not have a force majeure provision that it may invoke, there are other potential legal avenues (although often requiring difficult proof) to suspend or limit performance. These related doctrines and force majeure overlap considerably. …To excuse its performance, a party first must show the principal purpose of the contract and then establish that through no fault of its own, that purpose has been substantially frustrated because of an event that the parties did not assume or foresee.”

“Again, this calls for a legal analysis that carefully evaluates the nature of the agreement and the effect of the event in question (here, COVID-19) on the contract.”

For this article’s purposes I am not diving into doctrinal differences between frustration of purpose and impossibility (although I strongly suggest the reader examine the Wisconsin Bar article above, which touches on the close relationship between impossibility and frustration of purpose).

In Chemical Bank v. Washington Public Power Supply System, the Washington State Supreme Court summarized the commercial doctrine of frustration of purpose as:

Where the assumed possibility of a desired object or effect to be attained by either party to a contract forms the basis on which both parties enter into it, and this object or effect is or surely will be frustrated, a promisor who is without fault in causing the frustration, and who is harmed thereby, is discharged from the duty of performing his promise unless a contrary intention appears.

Chemical Bank v. Washington Public Power Supply System, 102 Wn.2d 874, 691 P.2d 524, (1984) citing Restatement of Contracts § 288, at 426-27 (1932); see also 18 S. Williston, Contracts § 1954 (3d ed. 1978); 6 A. Corbin, Contracts §§ 1355, 1356 (1962).

Although we need not examine the case at issue (botched nuclear power plants, billions in bond payments for unusable power plants taxpayers would otherwise foot), guiding case law still suggests an uphill battle for businesses claiming frustration of purpose vis-à-vis COVID-19. Yes, the mediators are busy with commercial lease disputes and default payments for April; however, breach of contract is an entirely different beast – especially as dollar amounts keep rising.

Like a great of things in these uncertain times, we shall see. COVID-19 is likely to produce a body of fascinating case law.

The author and Mrs. Lee miss normality.

If you have any questions concerning this article, COVID-19, or inquires about obtaining my legal services, feel free to contact me at rtl@rtleelaw.attorney. Please remember the above-article does not constitute legal advice, nor does it create an attorney-client relationship.

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