Since the COVID-19 pandemic began in March 2020, disruptions in supply chains and commercial transactions have resulted in the predictable efforts to shift loss among contracting parties. At first, the dominant effort focused on force majeure clauses in contracts. While there are undoubtedly dozens of cases pending in Ohio courts – no judicial opinion on this issue has been published to date. Recently, and to a lesser extent, parties have relied upon the frustration of purpose doctrine as a defense. Last week, an Ohio court of appeals considered and rejected this argument in a situation unrelated to COVID.
In Wroblesky v. Hughley, 2021-Ohio-1063, the Tenth Appellate District refused to recognize the frustration of purpose defense, noting it had been widely criticized in Ohio courts and was never formally adopted by the Ohio Supreme Court. In that case, the Wrobleskys entered into a written lease agreement for the express purpose of operating a bar and restaurant. When they failed to obtain the liquor permit, they sought to be released from the agreement contending, among other things, that the lease was unenforceable under the doctrine- of frustration of purpose. The court held, the lack of a liquor permit could have only restricted the purpose for the lease, not totally frustrated it.
The court’s opinion was reflective of the current judicial climate. Courts throughout the country have been unsympathetic to parties who seek to escape contractual obligations based on claims of frustration of purpose, particularly in cases involving the effects of COVID on businesses. A federal court in New York, Gap Inc. v. Ponte Gadea N.Y. LLC, (S.D.N.Y. Mar. 8, 2021) concluded “[t]he possibility that the stores at issue in this case may suffer particularly adverse financial consequences from the COVID-19 pandemic does not amount to frustration of the purpose of the Lease.” New York state court judges have made similar findings. 1140 Broadway LLC, 2020 N.Y. Misc. LEXIS 10358 ("Here, the lease was for office space in a building and the tenant's business was devastated by a pandemic. That does not fit into the narrow doctrine of frustration of purpose."); 35 East 75th Street Corp. v. Christian Louboutin L.L.C., 2020 N.Y. Misc. (“[The frustration] doctrine has no applicability here. This is not a case where the retail space defendant leased no longer exists, nor is it even prohibited from selling its products. Instead, defendant's business model of attracting street traffic is no longer profitable because there are dramatically fewer people walking around due to the pandemic."). The argument didn’t work for Chuck E Cheese either. In re: CEC Entertainment, Inc., (Bankr. S.D. Tex. Dec. 14, 2020) (operator of Chuck E. Cheese could not rely on the COVID-19 pandemic to avoid its obligations to pay rent in part because “the purpose of each lease is not entirely frustrated”).
Of course, there have been a few outliers. Notably, one Massachusetts court ruled that a retail tenant operating a coffee shop was excused from paying rent while indoor dining was prohibited by a state order. Umnv 205-207 Newbury, LLC v. Caffé Nero Ams., Inc., (Mass. Super. Feb. 8, 2021). According to the court, “the undisputed facts establish that Caffé Nero's continuing obligation to pay rent was discharged at least from March 24 to June 22, 2020, because the entire purpose of the Lease was completely frustrated while the Governor's COVID-19 orders barred restaurants from serving customers indoors.”
If the pandemic is really coming to an end, courts may not feel the need to accept these defenses. However, nothing is certain and parties to contracts and leases should consider all options to address the economic damage caused over the last 12 months. The recent case law demonstrates that the success of the frustration of purpose defense will depend heavily on the contractual language at issue and the circumstances surrounding the alleged frustration. Before withholding payments or performance, it is best to consult your counsel for a review of the rights and obligations set forth in your contract or lease.
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