In 2015, a company and other co-obligors purchased a cleaning franchise. Pursuant to the relevant asset purchase agreement, a portion of the franchise purchase price was to be paid in monthly installments from September 2018 to May 2022 and with a final balloon payment in May 2022.
Under the contract, failure to pay any of the installments would have triggered the seller’s option to demand immediate payment of all outstanding sums. Due to the outbreak of the COVID-19 pandemic, the buyers of the franchise and its co-obligors began to suffer significant economic losses. From April 2020, they failed to make the due monthly installment payments.
As a consequence, the seller filed suit against the buyer and its co-obligors. While admitting that they had failed to keep their promises, the defendants asserted that their obligation was excused, at least temporarily, under the doctrine of impracticability or the doctrine of frustration of purpose in light of the economic repercussions on the franchise’s operations during the pandemic.
With a judgment of 3 January 2023, the Supreme Judicial Court of Massachusetts ruled in favor of the seller (plaintiff) and dismissed the defendants’ exception that the pandemic excused them from their obligations. The Court highlighted that, at the time of the contracting, the franchise’s financial condition and revenues were not an essential assumption and that the parties’ contractual provisions placed the risk of changing financial conditions squarely on the co-obligors. As a consequence, the fact that the franchise was suffering economic losses on account of the pandemic could not excuse the defendants from their contractual obligations. In so holding the Court aligned to similar decisions over impracticability during the pandemic according to which “simply positing two facts - that the pandemic has occurred, and that a party finds it very difficult or even impossible to perform its contractual obligations - is not enough”. The Court further noted that the parties did not include a force majeure clause in their contract, thus suggesting that the relevant payment obligations were not conditioned on the financial success of the franchise.
Reference: Le Fort Enterprises, Inc. v. Lantern 18, Supreme Judicial Court of Massachusetts, 3 January 2023.