News

2407, 2020

Federal Government Publishes Record of Decision, Environmental and Economic Analysis, and CWA Permits for Ambler Road Project

July 24th, 2020|

Written by Jon DeVore, Elisabeth Ross and Nicole Bayne

On July 23, 2020, the Bureau of Land Management (“BLM”) and the National Park Service (“NPS”), within the Department of Interior, and the U.S. Army Corps of Engineers (“USACE”) published several decisions relating to the Alaska Industrial Development and Export Authority’s (“AIDEA’s”) proposal to build a 211-mile industrial access road to the remote Ambler Mining District.[1]  The road will connect the closest existing road, the Dalton Highway in the southern foothills of the Brooks Range of north central Alaska to the Mining District.  The documents released include, the Record of Decisions (“ROD”), the Environmental and Economic Analysis (“EEA”), and the Clean Water Act Section 404 permit.  The decisions were determined to be the least environmental impactful route, the shortest route, and has a remarkably small footprint potentially opening up one of the most mineralized areas in Alaska and the World.  The road and the potential developments will bring jobs to the region, revenue to the local and state governments, and potentially further benefit remote communities with access to broadband and commercial use.

In March 2020, BLM released the Final Environmental Impact Statement and selected AIDEA’s planned route as the preferred alternative, and found that the road could go forward without significant environmental impacts.  The FEIS laid the groundwork for today’s decisions.  The route selected in the EEA and ROD follow the route selected in the FEIS and include mitigation measures to protect wetlands, fish, wildlife and their habitat as well as subsistence hunting and fishing activities.

The Ambler Mining District has long been known for its prime mineral development potential, which has been explored and evaluated for more than a century.  Mineral resources found in the area include copper, lead, zinc, gold, silver, cobalt molybdenum and possible rare earth minerals.  Congress authorized in 1980 a right of way through the Gates of the Arctic National Park and Preserve (“GAAR”) in the Alaska National Interest Lands Conservation Act (“ANILCA”) to ensure ground transportation access to the Ambler Mining District.

Throughout the its years-long decision-making process, the federal agencies have consulted extensively with Alaskans and people in the Lower 48, including community meetings, tribal consultations, public input, and federal and state cooperation over the past three years.  BLM also worked closely with its consulting agencies, including NPS and USACE.

The ROD

The ROD fulfills the requirements under the National Environmental Policy Act and serves as BLM’s final decision.  The agency has approved development of Project Alternative A, identified in the FEIS, after many alternative routes from the West and the South.  This route was the original route proposed by AIDEA, accessing the District from the east after years of considering various alternatives.  It begins at Milepost (MP) 161 of the Dalton Highway and runs almost directly west for 211 miles to the District across primarily State-managed, BLM-managed, and GAAR lands.  Right of Ways on lands owned by Alaska Native Corporations will need to be obtained but the route carefully took into consideration concerns of local villages seeking to avoid impacting them.  This route crosses GAAR farther north than the other alternatives examined by the agencies and was the least environmentally impactful route after careful consideration.

The Section 404 Permit

Section 404 of the Clean Water Act establishes a program to regulate the discharge materials into waters of the United States, including wetlands.  Infrastructure development, such as Ambler Road, need permits under the program before any material may be discharged into waters of the US.  Individual permits are reviewed by USACE, which evaluates applications under a public interest review, as well as the environmental criteria set forth in the Clean Water Act and regulations promulgated by EPA.

During its permit review process, USACE adopted the BLM’s FEIS.  After analyzing the FEIS and other supporting materials, the agency determined that the route selected, Alternative A, was the Least Environmentally Damaging Project Alternative (“LEDPA”). USACE has granted a permit which authorizes the discharge of material and allows AIDEA to work within the navigable waters of the United States.

The EEA

ANILCA mandates that an EEA be prepared for the right of way across NPS lands to determine a preferred road alignment and develop appropriate terms and conditions for the permit.

Two alternative routes across NPS lands were identified in the project application materials.  The EEA examined each of these routes to determine which route would generate fewer adverse environmental, social, and economic impacts upon wildlife, fish, and their habitat, and rural and traditional lifestyles including subsistence activities.  The EEA’s determination was that Alternative A as the prefer and least environmentally impactful route.  The EEA also recommends measures that should be instituted to avoid or minimize negative impacts and enhance positive impacts.

The Project

The project proposed by AIDEA includes a 211-mile, all-season, industrial access road to the Ambler Mining District in the southern foothills of Alaska’s Brooks Range.  The private toll road will provide access for mineral exploration, mine development, and mining operations by connecting the District with the Alaska Pipeline Haul Road (Dalton Highway), an area currently without any road or surface access.  Local communities may have commercial access to the road when it is built.  Under AIDEA’s proposal, approximately 25 miles of the proposed road will cross BLM-managed lands.

It is estimated that the project will employ an annual average of 766 jobs during construction and an annual average of 141 from operations and road management once the project is complete.  It is also estimated that thousands of jobs will be created from mine construction and operations if they are permitted and developed.  AIDEA’s proposed project is only the industrial road.

This timely and significant decision fulfills the promise made by ANICLA 40 years ago guaranteeing access to the mineral district while mitigating the impacts to federal and state lands.  The Ambler Road Project is perhaps one of the largest infrastructure projects to potentially be built and funded from tolls and not public road funds in Alaska.  Birch Horton Bittner and Cherot (“BHBC”) was involved in the original ANILCA legislation and has been involved in the current permit process.  BHBC encourages broad public involvement in these types of Alaskan development projects which is why we share this with you.

For more information and to read the ROD visit: https://www.blm.gov/programs/planning-and-nepa/plans-in-development/alaska/AmblerRoadEIS

[1] See generally, US Department of Interior, Bureau of Land Management, Joint Record of Decision, DOI-BLM-AK-F030-2016-0008-EIS (Jul. 2020).

2307, 2020

Client Spotlight: Deidra Mitchell, President & CEO of Waséyabek Development Company, LLC

July 23rd, 2020|

Collaborative article by Bree Bieber and Jon M. DeVore

 

Birch Horton Bittner & Cherot (BHBC) is starting a new series highlighting a few of the unique leaders and businesses with whom we have the pleasure to work, and have seen develop, grow, and create positive differences within their industry and community.

Our first spotlight features Deidra Mitchell, who has diverse experience working in Alaska with an Alaska Native Corporation and other businesses before taking the helm of the Waséyabek Development Company, LLC (WDC). BHBC has had the opportunity to work with Deidra for over ten years, with the past four years at WDC watching her steady leadership and a focused strategy come to fruition.

WDC is a 100% Tribally-owned holding company formed by the Nottawaseppi Huron Band of the Potawatomi (NHBP).  The Tribe’s reservation is located in Southcentral Michigan and WDC is located in a multiuse building in Grand Rapids. While many Tribes throughout the U.S. have experienced economic growth due to expansion of gaming, NHBP chose to broaden their economic development spectrum to avoid singular and long-term dependence on gaming alone.

In 2011, WDC was established with the mission to create a diversified portfolio consisting of commercial real estate, federal contracting, and commercial operating companies.  Deidra Mitchell joined WDC in 2016 as President & CEO. Ms. Mitchell is a Kent State University graduate, has started multiple businesses, and held several executive level positions.  Since Ms. Mitchell joined WDC, she has successfully aligned resources and stakeholders managing the acquisition of five income properties, one consulting firm, and a manufacturing / R&D company for the WDC business portfolio. Her leadership has resulted in a stronger internal and external business infrastructure, increased revenue, and produced a 375% increase in assets.

WDC has increased from three employees to 285, with tribal members holding several management positions, and they have deployed over $50 million of capital towards economic development. Their federal contracting subsidiary, Waséyabek Federal Services, LLC (WFS) received 8(a) certification by the Small Business Administration in 2018 and since formed five subsidiaries, three of which are certified 8(a).

Today more than ever, the financial strain during COVID 19 stresses the need to diversify tribal government income streams.  WDC’s successful three-pronged buy-and-hold investment strategy provided financial stability during the unexpected closures by COVID of entertainment venues, casinos and hotels. We talked to Ms. Mitchell about the impacts that COVID has had on WDC, and how she, as a leader in tribal collaborations, foresees future changes within other tribal governments.

  1. How has COVID-19 affected WDC? In what ways has proactively diversifying WDC’s portfolio proven beneficial during these unexpected times?
    Overall, Waséyabek has had no material impact from COVID to our revenue and cash flow.  All of WDC’s companies continue to cash flow and our Federal contracts have been largely spared.  At most, we expect to see a 10% negative impact, which is mostly due to WDC voluntarily working with our retail tenants to provide them 90-day rent deferrals to help them manage the effects of COVID on their operations. Our portfolio consists of Commercial Real Estate, Commercial Operating Businesses, and Operating Businesses offering goods and services to the US Government (largely through the (8(a) Program). This diversification strategy was part of our initial strategic plan, which was agreed upon by all stakeholders involved, including myself, the WDC Board of Directors, the Nottawaseppi Huron Band of the Potawatomi (NHBP) Tribal Council and the Tribal Members. Part of that initial diversification strategy also included avoiding investments in the hospitality industry to ensure, to the extent possible, that circumstances impacting the Casino/hospitality industry do not impact the WDC portfolio of companies in the same way.  This diversification strategy has proven to be extremely effective during the pandemic.
  1. Do you foresee future changes to WDC’s business practices and procedures post-COVID?
    COVID has certainly changed some of my personal philosophies about conducting business.  Where videoconferencing was a rare and awkward communication choice for me before COVID, it is now common-place.  We have adapted to new technology and methods of communication, and there are some things I really like about it.  I think the change has also brought about a softer view from my standpoint on teleworking intermittently or when necessitated by geography; however, I feel that personal, face-to-face communication is still vitally important to key relationships and building energy around a business initiative and excitement in a team.  I think there is room for a healthy balance of flexibility, technology and in-person interaction.  I do think that there has been a healthy best practice that has come out of all this.  By more strictly evaluating whether long-range travel is imperative, important, or discretionary, we can collectively make better choices for the environment, employee work/life balance, and business expenses.  I think COVID has provided an opportunity for all of us to assess in our business practices and in our lives what we formally did out of habit versus what truly continues to serve all stakeholders.
  1. Understanding WDC has a strong desire to help tribal citizens who are small business owners, will this lead to different collaborations in the future?
    NHBP and WDC certainly support career development opportunities for Tribal Citizens and utilizing Tribally-owned small businesses.  I think the lessons that we learn from COVID will be applied to both of those initiatives. We will continue to apply a Tribal Hiring Preference in our portfolio companies and hopefully, there will be a broader realization among Tribal Members that it is important to personally gain all of the experience available to them and leverage some of the advantages provided by their respective Tribes in preparation for unprecedented times like we are experiencing now.  We employ several Tribal Members across our portfolio, and they are supported through individualized Tribal Member Development Plans, mentors, training programs, etc.  We also continue to apply a preference for utilizing Tribally-owned suppliers, vendors and contractors in our portfolio companies. COVID has emphasized the need for all of us to remain competitive, innovative and nimble.
  1. Do you think other tribal governments and Native American economic development companies will start to follow WDC’s lead of diversifying in the future?
    There are no right or wrong answers when it comes to Tribal economic diversification.  There are many Tribes that have very active economic diversification and development initiatives and those are based on that specific Tribe’s set of resources (financial, natural, and people), risk appetite, cultural alignment, etc.  What I hope others can take away from WDC is the importance to be clear and to have alignment about what your mission truly is, to develop a written strategic plan that transcends Board and Council Member turnover, build a financial model that aligns with and supports your plan, and then execute on the plan and remain disciplined to it. For example, our mission was to diversify BEYOND gaming, and due to that, excluded hospitality and entertainment as it related to the casino industry. The WDC CEO and the Board, as well as the NHBP Tribal Council and Membership, all agreed and we then set about documenting our strategic plan, building a financial model that predicted the investment that would be required as well as expectations for returns.  We have remained disciplined, aligned, and focused on implementing that plan.  It’s worked for us; even during the pandemic crisis.
  1. What does WDC do to support other Tribes with their economic development activities?
    An annual goal for me for the last three years as the CEO of WDC is to support the economic diversification of other Tribes.  This will continue to be an important goal for us as we seek to help other Tribes in their journey.

True to Ms. Mitchell’s commitment of supporting collaboration and the economic development of other Tribes, she co-hosts a monthly podcast called ‘Tribal Talks’ alongside Erika Weiss of Barnes & Thornburg. Their goal is to bring relevant and actionable information to Indian Country regarding starting, operating, and governing an economic development and diversification strategy for Tribes, welcoming a guest speaker monthly. Tribal Talks can be found at www.waseyabek.com/podcasts<http://www.waseyabek.com/podcasts and available at no cost to all interested Tribes.

Earlier this year, WDC co-invested with Gun Lake Investments (the economic development arm of the Match-E-Bee-Nash-She-Wish Tribe in Michigan) to purchase the McKay Tower in downtown Grand Rapids, MI. The McKay Tower, a mixed-use building, was a combined investment between the two Tribes of $17.5MM and produces monthly cash flow.

Ms. Mitchell recently coordinated the cooperation and development of a Michigan Tribal Non-Gaming Economic Impact Study among 9 of the 12 federally recognized Tribes in Michigan. The 9 participating Tribes own 38 Tribal Business Entities (TBEs) and the results of the study show Tribes are significant contributors to Michigan’s economy. In 2019 TBEs created $288MM in economic impact and produced 1,847 jobs in the state of Michigan.   The report was released on July 7.   The study quantifies the benefits of non-gaming TBEs to Tribal leadership and the state of Michigan, and the results will be shared with all Michigan Tribes to support their economic development initiatives.

 

Additional articles, links, stats, that came out since the publication of the Non-Gaming Michigan Tribal Economic Impact Study:

Michigan Tribal Non-Gaming Economic Impact Study Media Coverage:

  • Grand Rapids Business Journal Interview w/Deidra Mitchell held on 7/10 – to be published on 7/24
References:
https://Waséyabek.com/deidra-mitchell/
https://www.ncaied.org/post/spotlight-on-a-tribal-business-waséyabek-development-company-and-ceo-deidra-mitchell
https://acgwm.wildapricot.org/resources/Documents/Final%20-%20Deidra%20Mitchell’s%20Speaking%20Bio%20-%20Aug%202018%20(002).pdf
https://mibiz.com/sections/economic-development/tribes-leverage-best-practices-in-scaling-up-business-investment-strategies
https://www.bridgemi.com/business-bridge/michigan-tribes-losing-police-health-budgets-coronavirus-shuts-casinos?utm_source=Bridge+Magazine&utm_campaign=4d15a51795-Bridge+Newsletter+04%2F28%2F2020&utm_medium=email&utm_term=0_c64a28dd5a-4d15a51795-82271683
2905, 2020

BHBC Participates in Webinar “”Reopening Woes: When Reopening Your Business Brings More Questions Than Answers”

May 29th, 2020|

 

Birch Horton Bittner & Cherot attorneys Jennifer Alexander and David Karl Gross joined forces with RISQ Consulting for a round table discussion on what businesses and organizations must consider when reopening to protect against legal liabilities. RISQ Consulting is an Alaskan company providing customized insurance programs and comprehensive employer services and hosts monthly webinars based on trending topics.

Below is the recording of the webinar and the link to find all resources mentioned in the presentation:

Webinar
Resources

BHBC would like to extend our appreciation to RISQ Consulting for extending the opportunity for us to participate and share our expertise to local businesses.

1405, 2020

There is No Sanity Clause – Performance of Contracts in Bankruptcy

May 14th, 2020|

Written by George R. Pitts

There is a famous scene in the Marx Brothers’ film Night at the Opera in which Groucho, representing an opera company, tries to get Chico, representing a singer, to sign his singer up with the opera company.   They begin with a lengthy contract on legal-size paper and as Chico reviews and rejects the various provisions, Groucho tears them off, until he is left only with a thin horizontal bit of the document. He tells Chico that he (Chico) has got to like this one, because it merely requires each party to represent that he/she is of sound mind. Chico is adamant in rejecting this clause: everyone knows there is no “Sanity Clause.” After reviewing the rest of this piece, the reader may feel just like Chico.

As we are warned of an avalanche or tsunami of bankruptcy cases (depending upon one’s preference for earth or sea), it will be useful to look at a situation that could face any business at any time: a customer, a supplier or a vendor files for bankruptcy with the objective of getting rid of all that pesky debt, cleaning up an ugly balance sheet and having a fresh start. Usually, when this happens, the bankrupt is already in default under your contract: for example, it has not paid for things you sent or it has not sent items that you paid for and you are prevented from doing anything about it by the automatic stay of creditor action against the debtor after bankruptcy is filed.

Let us also say that you as a supplier, in order to compete effectively in a tough marketplace, gave terms to the debtor – let us say 30-day terms – and that the debtor orders more than $1 million in products from you during a given 30-day period (that is part of the reason that you gave the debtor terms). Now, however, the debtor has filed a bankruptcy case, owing you almost $1 million for products already sent, and now contacts you asking that you continue to ship on terms. You throw the cell phone across the room and don’t think about this situation any longer because it is so ridiculous. Then papers are delivered to you in the debtor’s bankruptcy case, demanding performance under your contract. Do you treat the lawsuit the same way you did the cell phone? As you may guess because this article appears in a law firm blog, the answer is no.

Many business debtors file for bankruptcy not only because they have substantial debts but also because they are parties to bad contracts with suppliers, other businesses or landlords. Think of a retailer that is paying too much for the products in its stores and too much in rent to have the use of stores it no longer wants to operate. In addition to providing some relief from debt generally, bankruptcy also allows the debtor to review its contracts and leases, determine which are good for the business and which are not, and essentially divest itself of the contracts and leases that are not good for the business. Divestiture takes the form of “rejection” of a contract under Section 365 of the Bankruptcy Code. Once a contract is rejected, the other party has a claim for damages that is treated as if it arose before the bankruptcy case was filed. If the debtor wants to continue with the contract, it is “assumed,” or instead “assumed” and then assigned to someone else (usually a purchaser of assets from the debtor who wants the benefit of the contract along with the assets). If a contract is assumed, the debtor/assignee must cure all defaults under the contract and provide “adequate assurance of future performance” (that is, not provide immediate and glaring evidence of inability to pay or perform).

In order for a contract to be subject to assumption or rejection, some performance must be due on each side or, in bankruptcy language, the contract must be “executory.” Although the Bankruptcy Code provides a list of definitions for various terms it employs, somewhat surprisingly, “executory contract” is not among them. Nevertheless, the definition I have provided is uniformly accepted by the courts and disputes regarding whether a contract is executory or not arise in connection with how much, or how little, performance is required to keep a contract “executory.” The answer is: not much. Even a license agreement, under which the licensor is allowing the licensee use of a trademark – for example “Motel 6” – is executory because the licensor must maintain and defend the trademark. Thus, if you have a contract with a debtor that obligates you to do anything at all, you should at least assume that it will end up being executory. Contracts to lend money or to extend financial obligations are not, however, executory, no matter how much they may look like they are. Why? Because the Bankruptcy Code says so in Section 365(c)(2).

Now, of course, bankruptcy cases, even if planned, often have to be planned in a hurry, and a debtor will need time after the filing to figure out what it wants to do, what its creditors will allow it to do, and what the court will determine is appropriate under the circumstances of the case. What happens to executory contracts while the debtor is trying to figure out which ones to assume or reject? Suppose the debtor requires performance under an executory contract in order for its business to survive? For example, take the case of a bankrupt airline to which you supply fuel to keep the planes in the air. The debtor might want to see if it can get a better deal on aviation fuel before it decides what to do with your contract, but, in the interim, it needs the fuel. Suppose the debtor owes you $2,000,000 for fuel supplied before the bankruptcy was filed: may the debtor force you to supply fuel under the terms of the contract, including credit terms, before it decides whether to assume or reject your contract?

Most bankruptcy courts answer ”yes” to this question, on the general theory that this result “preserves” the contract for assumption or rejection and provides the debtor with the necessary time to make intelligent decisions about its executory contracts. “[A] debtor-in possession’s ability to continue to perform and to compel performance with respect to assumable executory contracts is usually the life blood of its reorganization,” says the United States Bankruptcy Court for the Southern District of New York. In re McLean Industries, Inc., 96 B.R. 440, 449 (Bankr. SDNY 1989). (In a liquidation case under Chapter 7 of the Bankruptcy Code, early rejection of executory contracts is compelled, because there is no business to reorganize.)

You will notice that I said that “most courts” agree with the SDNY – most, but not all. If you happen to be involved in a bankruptcy case in the Western District of Michigan, which includes Grand Rapids, headquarters of Amway and birthplace of President Gerald Ford, you will find that the matter of executory contracts is handled differently. First, one starts with the proposition that what comes into bankruptcy is not magically transformed by its transit from ordinary business life into a bankruptcy estate. Second, under general principles of contract law, if the other party is in material default under your contract, you have no obligation to continue performing until the default is cured. Restatement, Second, of Contracts, Sections 225, 242.   Therefore, a debtor that is material default under your contract cannot force you to perform until the contract is assumed and the default cured. In re Lucre, Inc., 339 B.R. 648 (W.D. Mich. 2006) (yes, the debtor company in this case was called Lucre, Inc. – as Nietzsche said, we have art to protect us from the truth).

So, which approach is correct? Lawyers will often answer this question by identifying the client they represent. Or, one can say that, unlike science, in law, you begin with the answer and work your way back to the question.   Nevertheless, it is important to realize that, in the absence of a Sanity Clause, all we have are the analytical and logical tools that the law provides, which are often more extensive than we might think. Those tools, properly employed, often lead to just results, or, at a minimum, results that we can understand, if not endorse. Therefore, the next time you hear the words “executory” and “contract” applied to any contract to which your business is a party, have your bankruptcy lawyer on speed dial.

405, 2020

Alaska Supreme Court Once Again Hammers a Contractor on the Requirements of a State Contract

May 4th, 2020|

Written by Adam Cook

Even with recent cuts in state spending, the Alaska Department of Transportation and Public Facilities (“DOT”) still provides about $500 million in contracts every year to Alaska’s contractors and subcontractors.  That’s about seven percent of all construction statewide (federal spending is by far the biggest driver in construction).  Thus, for most builders in Alaska, there is a good chance DOT construction is going to account for some portion of their job portfolio.

A recent decision by the Alaska Supreme Court, Department of Transportation v. Osborne Construction Company, underscores the importance of reading these contracts closely and following their requirements carefully.  DOT hired Osborne Construction to build soil structure improvements at the Fairbanks International Airport in 2013.  Osborne’s subcontractor encountered soil conditions different from those anticipated.  The subcontractor also struggled to procure sand for the project.  Following conclusion of the work, Osborne sent a claim to DOT demanding additional compensation for expenses incurred because of these unexpected conditions.  The DOT contracting officer denied the claim because Osborne had failed to submit the claim “within 90 days of becoming aware of the basis for the claim.”  Osborne unsuccessfully appealed the denial to the DOT Commissioner and then the Alaska Superior Court.

The Alaska Supreme Court upheld the prior rulings.  Osborne argued that it did not fail its contract obligations by submitting its claim more than one year after discovery of the costly conditions, because it was only “aware of the basis for the claim” after the contracting officer denied additional reimbursement, breaching the contract.  But the Court noted that an act serving as “basis for a claim” was defined in the contract as an act giving rise to a demand for additional compensation, not a denial of such demand.  Osborne knew or should have known that it had a claim immediately after incurring the additional costs to address the unexpected condition.  Osborne waited so long that it waived its right to make a claim.

The Alaska Supreme Court’s strict adherence to the State’s contract requirements regarding demands for additional money echoed a decision from seven years ago, North Pacific Erectors, Inc. v. State, Department of Administration.  In that case the builder had encountered unexpected difficulty removing asbestos, then failed to submit a claim documenting the “actual costs” it incurred.  The contract clause governing differing site conditions had specified “complete, accurate, and specific daily records concerning every detail of the potential claim, including additional costs incurred.”  The contractor had submitted a claim cost summary that was generalized, providing no specificity as to actual labor hours or additional materials.  The Alaska Supreme Court held that the contractor was barred from recovery because it had failed to follow the express provisions of the contract.

While the Osborne decision highlights the importance of making claims promptly, North Pacific Erectors highlights the importance of documenting claims thoroughly.  The decisions also demonstrate a restrictiveness in state contracting that is not necessarily present at the federal level.  Courts in some jurisdictions may take the attitude that contractors are not lawyers and cannot be expected to follow the hard letter of the lengthy terms and conditions they agree to.  The Alaska Supreme Court has once again indicated that it will grant no such leniency.  
2904, 2020

The Legal Doctrine of Frustration of Purpose Makes a Comeback in the Face of COVID-19

April 29th, 2020|

Written by David Gross

There is a seldom-used legal doctrine called “frustration of purpose” that provides a party with the ability to walk away from a contract when the purpose of a contract is totally defeated by an unexpected event. This doctrine was first established in English law with a case called Taylor v. Caldwell. In that case, which was decided in 1863, a party contracted to rent a music hall for the performance of a concert. After the contract was signed, but before the concert was set to take place, the music hall burned to the ground. Since the concert could not go forward, Judge Blackburn ruled that the contract had an implied condition that the music hall must be in existence at the time of the concert. Since the concert hall was no longer in existence at the time of the concert, both parties were required to walk away from the contract.

Another example, which is found in the Restatement (Second) of Contracts, is where a person rents out a balcony to watch a parade. Due to the illness of an important parade official, the parade is cancelled. The person does not pay for, or use, the balcony, effectively breaching the contract. However, the parade watcher is not liable for a breach of contract due to the doctrine of frustration of purpose, as the entire purpose of renting the balcony was to enjoy the parade.

This doctrine was quite prevalent in 1919 when the Eighteenth Amendment was passed, making the manufacture, transportation, and sale of alcohol illegal. With the passage of this Constitutional amendment, many establishments had to go out of business, in particular, bars and saloons. If a party rented out a space specifically to operate a bar prior to Prohibition, and where after Prohibition the bar could no longer sell alcohol, case law demonstrated that the purpose of the lease (i.e. to sell alcohol to the public) was frustrated, meaning that the tenant could break the lease without liability.

Now that we are facing a global pandemic as a result of COVID-19, there are a number of circumstances where the doctrine of frustration of purpose will apply. For example, taking the case of Taylor v. Caldwell, one can envision a situation where a music hall or stadium is unavailable because of federal, state, or local mandates. If someone rented out such a venue for a concert or sports event, the doctrine of frustration of purpose will likely result in a finding that no rent need be paid when the venue is unavailable due to an unexpected event. Certainly, a strong argument can be made that closures caused by COVID-19 are certainly unexpected, unanticipated, and unforeseeable.

When considering whether this doctrine may apply to your particular situation, there are a few things to consider. First, when this doctrine has been successfully applied in the past, there has typically been nothing in the contract that discusses what happens if there is an unexpected event, such as a force majeure clause. If the contract specifically sets forth what happens in an unexpected event, the contract language will apply, and not the doctrine, even if there is a legitimate frustration of purpose.

Second, the doctrine only applies as long as the unexpected event frustrates the purpose of the contract. For example, if we again look to the facts of Taylor v. Caldwell, but we assume that the rental of the concert hall was for an entire year, the doctrine of frustration of purpose would only last until the music hall was rebuilt. This is true because once the music hall was again available to hold concerts, the purpose of the contract would no longer be frustrated.

Finally, in order for this doctrine to succeed, the entire purpose of the contract must be frustrated. If the contract provides for a number of things, but only a few of them are frustrated, this doctrine may not apply. Or, if the contract is just hampered or hindered (such as if the arrangement can continue, but is no longer as profitable to one of the parties) that doctrine may not apply to excuse performance. In other words, the doctrine is most applicable when the entire contract simply cannot be performed or no longer makes any sense.

If you find yourself in a situation where your business is closed or operating in a limited capacity due to COVID-19, or if your business is impacted by travel restrictions, you may benefit from the application of the doctrine of frustration of purpose. Of course, every situation is different, and this doctrine is very dependent on the particular facts involved. If you think this doctrine may be available to you it would be prudent to have an attorney consider your specific circumstances. The attorneys at Birch Horton Bittner & Cherot are prepared to discuss your obligations and potential remedies with you.