ContractsProf Blog

Editor: Jeremy Telman
Valparaiso University Law School

Thursday, January 28, 2021

Farshad Ghodoosi, Contractual Allocation of Risk in Times of Crisis, Part III

Farshad Ghodoosi
Assistant Professor of Business Law
David Nazarian College of Business and Economics
California State University, Northridge

Today’s post is the last post about my article on force majeure clauses. In the last two posts, I first described my article’s explanations (based on law & economics and behavioral approaches) of force majeure clauses. In the second post, I shared the article’s empirical findings. Today, I share with you my suggestion concerning the inclusion of reliance theory in force majeure analysis.

III. Normative Prescriptions

As evidenced from the previous two sections, courts tend to focus on the controllability factor more than foreseeability and lexical interpretation. The control factor in particular places the center of inquiry on promisor’s ability to control. For example, in the aftermath of 2008 financial crisis, in Elavon v. Wachovia, the court stated that continuation of the referral program was well within Wachovia’ and Wells Fargo’ control and therefore does not relieve them from performance.

I argue that this approach is insufficient mainly because it ignores promisee’s degree of reliance. Put differently, current force majeure analysis does not take into account the degree of (true) reliance on promises.

GhodoosiLet’s imagine two students who enrolled in a college: Student A decides to attend this college after touring the campus, visiting the physical facilities including the gym, and classroom sizes. Student B does not plan to spend much time on campus and decides to attend primarily because of its local reputation. Now come Covid-19 restrictions and both have to attend the school online. If both student A and B assert breach of contract and seek restitution, should the law treat them the same?

The current approach seems to treat them the same. I argue, however, that we may be able to use Section 90 of the Restatement (Second) of Contracts and the notion of promissory estoppel to differentiate between these two students. Applying reliance theory, Student A’s degree of reliance on the physical facility is far greater than Student B's. Therefore, it may be more equitable to differentiate between the two by granting restitutionary damages (e.g., refund on tuition) and reliance damages (e.g., expenses and fees related to the lease) to Student A (for further discussion on restitution in this context see David Hoffman & Cathy Hwang's recent article). Using my suggested approach, I analyze the recent case between Edison Ballroom v. Columbia Law School and Gap v. Ponte Gadea. In both cases, by taking into account the degree of reliance by parties (for example Edison Ballroom’s degree of reliance on Columbia Law School’s hosting of its Barrister’s Ball), courts are able to fashion more equitable remedies and outcomes in lieu of the harsh zero-sum game of the current approach (excuse v. no excuse).

As to the reliance theory, a narrow and classical approach views Section 90 as only applicable to defects in formation, in particular lack of consideration. But the language of the section and the developments of promissory estoppel in courts’ opinions as explained in the article is not necessarily prohibitive of its applicable in this context. For example, promissory estoppel has been expanded to situations such as interpretation of an offer, timing of acceptance, preliminary agreements, indefinite agreements, and circumstances under which one party will be allowed to recover in restitution. (A shameless plug, I invoked promissory estoppel in the context of smart/automated contracts here because it is most protective of users of such platforms).

In summary, this paper shows that parties include force majeure clauses to seemingly shift the focus to the events and not their intent at the time of formation and that courts employ the control standard more than other factors. Normatively, I contend that the more equitable outcome can be achieved if promisee’s reliance is also taken into account.

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