University of Akron’s Invocation of Force Majeure

In May, the University of Akron invoked the “force majeure clause” in Section 12 of Article 15 its collective bargaining agreement*( with the University of Akron’s American Association of University Professors (“AAUP) chapter and declared its intent to lay off faculty. The reason?  Financial losses stemming from the worldwide pandemic.  

In June, Akron’s AAUP chapter filed a grievance against the University and the matter went to arbitration. In July, the University announced plans to eliminate 178 positions, including 96 unionized faculty members, in a move that was referred to as a budget “bloodbath.”  On Sept. 18, the arbitrator issued his decision.  Many readers of this blog may have already heard this news from the TaxProf Blog here.  But here at the ContractsProf Blog we like to delve into the fine print.  So what happened?

First a little contractual context.  Article 15 pertains to “retrenchment” (cutting back expenses) which may be necessary in one of four situations, including (but not limited to – this become important later) “financial exigency” and “significant reduction in enrollment” over five or more academic semesters.  Article 15 has very specific procedures that should be followed in the case of retrenchment, such as notification requirements, opportunity to inspect and obtain information, the order in which faculty will be affected, etc.

Section 12 of Article 15 provides:

The procedure for retrenchment set forth in this Article is designed to accommodate both the orderly change in the University and reductions that must accompany more abrupt changes in circumstances. The parties recognize that catastrophic circumstances, such as force majeure, could develop which are beyond the control of the University and would render impossible or unfeasible the implementation of procedures set forth in this Article. Therefore, this Section 12 shall not be used to accomplish retrenchment as set forth in this Article. If such unforeseen, uncontrolled and catastrophic circumstances should occur, then the University agrees that, before taking any action that could be interpreted as bypassing the retrenchment procedures, representatives of the University will meet with representatives of the Akron-AAUP to discuss and show evidence of the circumstances described above and that this evidence will at least satisfy the requirements outlined in Section 3(A) of this Article and to discuss the proposed course of action.

In other words, the University did not want to follow the retrenchment process of Article 15 and used Section 12, aka the force majeure provision of Article 15, to get out of doing so.

The AAUP made several arguments against the University’s invoking the clause.  First, it argued that Section 12 required that the circumstances be “catastrophic” and that the financial situation of the University was not.  The projected financial situation of the University was, it argued, based on inflated assumptions.  It noted that enrollment for the fall semester was “significantly better” than predicted.  The AAUP also argued that the proposed budget contained a projected deficit of $7.8 million which was “less than one-eighth” of the projected $65 million deficit that was used to justify the faculty layoffs during a prior meeting.

It also argued that the faculty cuts were not necessary, but a continuation of the university’s disinvestment of academics and privileging of athletics.  It also noted that the Administration “did not identify one administrative position that was being eliminated” and that other cost saving measures could have been taken.  In discussions during the summer, AAUP proposed cost saving measures instead of lay-offs, including possible furlough, retirement incentive adjustments, equivalent salary reductions and increases in health care contributions. AAUP argued that Section 12 did not negate other provisions of Article 15 which set forth rights that faculty have and that the University did not give appropriate notice.

The University responded that the Governor’s declared state of emergency and the cancellation of classes were events that were “catastrophic, unforeseeable, and beyond the University’s control” and allowed it to invoke Section 12 (i.e. not follow the retrenchment procedures of Article 15).  The University stated that although it does have (substantial) cash reserves, it cannot deplete those because if they become too low, the University’s credit rating could be downgraded.  It basically argued that there just wasn’t time to come up with a new plan as AAUP urged.  There were several other arguments having to do with procedure and notice. 

The arbitrator focused on the COVID pandemic, noting that it is indeed “catastrophic” with “worldwide effects.” Ultimately, the arbitrator sided with the University and found the invocation of the force majeure clause was justified; however, he found that the clause did not excuse the University from complying with sections that refer to “right of recall if positions are reauthorized,” found that these provisions were “feasible and possible to implement” and found for AAUP on that issue. 

I don’t think that the arbitrator reached the right result for two reasons:  First, it conflated “financial exigency” with “force majeure.”  Second, it used the conflated force majeure/financial exigency as a reason to excuse performance of all the provisions of Article 15 even those which were not rendered “impossible” or “unfeasible.”

Regarding the first point, the very purpose of a retrenchment process is to address potential financial exigency – that’s expressly stated.  So there has to be something about the nature of this financial exigency that requires immediate action of this sort – or else.  What Section 12 does, IMO, is allow the University to bypass some of the lengthy processes in the event of an emergency.  For example, if lightning strikes a building and destroys everything in it, that is clearly a force majeure event that would cause financial exigency.  I think the pandemic and the state order are force majeure events which, under Section 12, could mean that the notice provisions of Section 3 might be excused (granted there is evidence they could not meet them – which it seems they could, IMHO).  A force majeure event, however, doesn’t allow the University to walk away from Article 15 or all its contractual obligations unless there really is nothing else to be done.  Keep in mind that Article 15 covers retrenchment for other reasons, such as discontinuation of a department, so Section 12 must also be interpreted as applying to those other situations, not just financial exigency.  The discontinuation of a department because of a lightning strike might excuse some of the retrenchment provisions in Article 15 by way of Section 12.  As a matter of interpretation, Section 12 should not be construed as meaning the same thing as Section 1 (financial exigency).  That wouldn’t make sense from a drafting perspective.

Regarding the second point, while the pandemic is certainly an unforeseeable event, it is not necessarily a discharging event.  Courts generally prefer the path that results in less harm and tend to allocate losses from force majeure events according to equitable principles; often they will place the burden on the party that has more control over the situation.  In this case, I think the University could have done more to reduce the harm to the faculty.  Some of what was proposed by the union instead of layoffs – salary cuts and/or furloughs, for example – would seem to align with what was anticipated by Section 12.  It is not “impossible” or “unfeasible” to do those things first, especially given the cash reserves.  The potential credit downgrade is not a catastrophic event.  I especially think the University should have been held to Section 11 of Article 15 which requires one year continuance of University health care insurance without charge for released faculty.  But the Arbitrator found that the “financial outlay would only add to the financial burden” and thus it was “not possible or feasible.”  An increased financial burden alone does not make performance impossible or unfeasible, however.  That’s pretty well established in contract law. 

In my opinion, the University did what was most expedient, not what was strictly necessary.  But force majeure clauses need to be performed in good faith, just like other contractual clauses.  I have particular issue with the Arbitrator’s conclusion that the University could not afford to pay for an additional year’s health coverage for its laid off faculty.  I find that a mean-spirited decision (aka acting in bad faith), especially given its reserves – and in the midst of a pandemic?  So what are the faculty supposed to do without jobs and no health coverage as we all brace for the second wave? 

*(H/T to Ben Davis for posting the link to the agreement on the contracts list serve).