Frustration, the MAC Clause, and COVID-19

Abstract

COVID-19’s impact on business has been exasperating—but is it Frustrating? The Frustration doctrine of contract law excuses a party from its contractual obligations when an extraordinary event completely undermines the principal purpose of making the deal. This doctrine has long been a marginal player in contract litigation, as parties rarely invoked it—and usually lost when they did.

The COVID-19 pandemic, however, is precisely the type of extraordinary event that Frustration was designed to address, and the courts have been inundated over the past year by a wave of colorable Frustration claims. This timely Article describes the Frustration doctrine and explores its application to the countless contracts whose purpose was undercut by the pandemic, such as leases for restaurant spaces in cities that banned dining service. The caselaw that develops out of the COVID-19 pandemic will define the Frustration doctrine for the next fifty years, and this Article provides an early assessment of the reported cases.

Similarly, the Material Adverse Change (MAC) clause, a standard term in corporate acquisitions, allows a buyer to back out of a deal if the target company suffers a ‘material adverse change’ between signing and closing. In prior work, the present author argued that the MAC clause should be understood as a liberalized version of the Frustration doctrine, and this claim was adopted in the first Delaware case to find that a MAC had occurred, Akorn v. Fresenius.

Like Frustration claims, MAC clauses have rarely been litigated, and claimants were almost universally unsuccessful. The COVID-19 pandemic, combined with the Akorn precedent, has led to numerous high-profile MAC claims, including one against jeweler Tiffany & Co. As with Frustration, the present wave of MAC litigation will establish the standards for MAC claims for years to come. This Article accordingly examines the merits of MAC claims premised on COVID-19 and reports on the one case decided to date.

Keywords: Contract, COVID-19, Coronavirus, Pandemic, Frustration, MAC Clause, Force Majeure

JEL Classification: K00, K1, K12, K22, I1, I18