Question: To manage travel arrangements for a convention slated to take place next month, our agency signed contracts to charter dozens of buses and block hundreds of hotel rooms. Now we are forced to pay suppliers hundreds of thousands of dollars even though the convention was canceled due to Covid-19. While the hotels have been somewhat cooperative in offering to defer the debt to a future agreement, the bus companies are demanding to be paid in full. Do we have legal grounds to refuse to pay because of Covid? What about force majeure?
A: Force majeure would only apply if you were physically prevented from making a payment, which is not the case here. However, there is a similar legal doctrine called “purpose frustration” that may well provide you with a valid defense if the vendors sue you.
Although contract law varies somewhat from state to state, the doctrine of frustration of purpose applies in almost all states. The legal treatise which explains the doctrine states, somewhat opaque:
“When, at the time of the conclusion of a contract, the main objective of a party is substantially hindered without its fault by a fact of which it has no reason to know and whose non-existence is a basic assumption on which the contract is concluded, no obligation of that party to effect performance arises, unless the language or circumstances indicate otherwise.
In other words, you don’t have to pay if: (a) the purpose of the contract was to accommodate conventioneers, (b) that goal cannot be achieved due to an event such as a pandemic, ( c) neither you nor the supplier had reason to suspect a pandemic at the time of signing the contracts and (d) the absence of anything like a pandemic was a basic assumption of the parties when they signed.
The explanatory commentary to this section of the treaty specifies that a party’s contractual obligation is discharged only if certain conditions are met:
“The object must be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense. … The frustration must be so severe that it should not be regarded as being part of the risks he assumed under the contract … The non-occurrence of the frustrating event must have been a basic assumption on which the contract was concluded.
It seems that your situation meets all of these conditions. Even if you have the money to pay for bus lines and hotels, paying for them doesn’t make sense. The loss to you would be so severe that it would be considered not to be part of the risks you assumed, and you must have assumed that there would be nothing like a pandemic that would cause the agreement to be canceled.
You may have to wait until you get prosecuted before a judge can rule on the validity of your goal frustration defense, but I think you would have a good chance of winning.