FORCE MAJEURE IN TUMULTUOUS TIMES: IMPACT OF PANDEMIC ON REAL ESTATE COMMERCIAL CONTRACTS AND IMPOSSIBILITY OF PERFORMANCE
Today, as countries around the globe begin to aggressively respond to the COVID-19 virus, the government working to contain the outbreak of this corona virus pandemic by taking drastic measures and precautions calling for social distancing, closing of offices and other businesses, and eviction suspensions, the ramification of which is the capital markets have been in turmoil for months. For real estate and other patrons who have entered agreements for the purchase and sale of property and commitments to such fund transactions, as well as commercial leases, construction contracts and property agreements, the uncertainty caused by COVID-19 response has raised critical questions about if, and how, to proceed with the planned transactions.
Contemplating the chaos caused by the
outbreak of COVID- 19, has disrupted the world’s economy in ways that were
unimaginable in the past few weeks and it
is foreseen that this shall prolong with uncertainty. The pertinent question
which arise here is, will this disruption justify you or your counterparty's
contractual rights and obligations under real estate related contracts? The
answer will depend on the presence or absence of a “Force Majeure”
clause in commercial contracts. The law relating to Force Majeure,
deriving its meaning from the French phrase used to describe a “Superior
Force” event. The purpose of a force majeure is to allocate risk
and to provide notice of events that may delay or excuse performance by the
parties. Such provisions can be found in all types of real estate related
documents.
In the face of challenging the health
and safety reasons, companies are taking a neat look at the force
majeure clauses in their contracts to evaluate and assess their
obligations when non-performance becomes an issue due to frustration of
purpose, intervening government conduct or impracticability.
Force majeure is an age-old concept
that excuses contractual performance due to events beyond the control of the
parties. Force majeure clauses are typically found in real estate related
documents, that include loan agreements, leases, construction contracts,
development agreements and in some cases, purchase and sale agreements. These
provisions do not typically alleviate the performance of financial obligations.
For instance, parties still have to make rent payments under commercial leases.
Force majeure is present in common law as the doctrine of frustration of
contract. Section 56 of The Indian Contract Act, 1852 states the ‘Doctrine of
Frustration’ wherein any act which was to be performed after the contract is
made becomes unlawful or impossible to perform, and which the promisor could
not prevent, then such an act which becomes impossible or unlawful will becomes
void. The Supreme Court of India in the case of Ganga Saran v. Firm
Ramchand Ram Gopal (AIR 1952 SC 9) has pointed out that the doctrine of
frustration could not be availed by the defendant when the non-performance of
the contract was attributable to his own decision.
Further, the doctrine asserts that a
contract will be frustrated if its fundamental purpose is destroyed. If this
happens, then the parties to the contract will be discharged from their
obligations to perform the contract. The doctrine of frustration comes into
play only when a contract becomes impossible of performance, after it is made,
on account of uncontrollable circumstances of the parties or the change in
circumstances making the performance of the contract impossible. The Court can
grant relief on the ground of subsequent impossibility, if it finds that the
whole purpose or the basis of the contract has frustrated by the intrusion or
occurrence of an unexpected event which was not anticipated by the parties at
the date of the contract.
However, it is seen that applicability of both force majeure and frustration of
contract is governed by a supervening impossibility of an event which is
unforeseen and is not attributable to either parties. If it is foreseeable,
then it will be a breach of contract and hence non-excusable. Also, this
supervening event must render the performance of the contract impossible in
both the cases. The basis of the doctrine of frustration in English Law is laid
down in the case of Taylor v. Caldwell ([1863] EWHC QB J1).
It was held that when an opera house, which was rented for holding concerts was
destroyed by fire, the contract of rent becomes frustrated as the very thing on
which the contract depended on, ceased to exist as result of uncontrollable event.
Thus, it was understood that for the doctrine of frustration, it must be so,
that the nature of contract is such that it would not operate, if a thing
ceased to exist. In another case of Krell v. Henry ([1903] 2
KB 740), it was observed that where rooms were rented out along the route of
the procession for the King’s coronation and the coronation was postponed due
to the King’s illness, the contracts for renting out the rooms were held to be
frustrated. This meant that the doctrine of frustration would also apply to
cases wherein a certain thing or an event stands cancelled or did not happen.
Courts by the means of multiple
judgments have defined force majeure as “an event or effect
that can be neither anticipated nor controlled”. The force majeure events
include an Act of God or natural disasters, war or war-like situations, labour
strikes, epidemics, pandemics etc. While an “Act of God” is often used
interchangeably in contracts and case laws, there is a limited authority as to
whether a pandemic/epidemic will fall within either category; particularly when
the force majeure clause does not specifically refer to it. The
effect of both force majeure and the doctrine of frustration leads to discharge
of contract between the parties, thus relieving them of their obligations under
the contracts. Due to the apprehension that courts may not apply the concept of
frustration of contract, parties incorporate force majeure clauses in their
contracts specifically providing relief from any liability in case of an event
which may render the performance of the contract impossible. Again force
majeure clauses may also provide for extension of time, instead of relieving
the parties from their obligations on the happening or non-happening of a
certain event. For instance, Y contracts to build a commercial complex in city
X. Climatic conditions are such that, it is normally impossible to work between
November to March of subsequent years. The contract is timed to finish by end
of October, but the start of work is delayed for a month by a civil war in a
neighboring state which makes it impossible to bring in most of the
construction material on time. If the consequence is reasonably to prevent the
completion of the work until its resumption in the following spring, Y may be
entitled to an extension of five months even though the delay was itself of one
month only. This is the difference between force majeure and frustration of
contract. So, contracts which provide for shipment of goods from one place to
another have such clauses which say that, if goods are not delivered within a
certain period of time then some additional time will be stipulated for
delivery, failing which the contract may be cancelled.
For those parties that have expressly included
force majeure provisions within their contracts, the courts have generally
construed such clauses closely to provide remedies only for the specific events
or situations referenced in the contract. To the extent that two parties to an
agreement did not explicitly incorporate such a clause, courts generally
will not provide the rights offered by a force majeure provision. In certain circumstances,
however, a court may apply the ‘doctrine of impossibility’. As the name of this
doctrine implies, the performance of a party may be excused in certain extreme
situations that were not contemplated in the contract. For example, an
agreement to discover a treasure by magic, being impossible of performance, is
void, and the court would imply the doctrine of impossibility to terminate the
obligations of the parties under the agreement.
In case where, force majeure clauses
are not incorporated in contracts between the parties, and if there occurs an
event which makes the contract’s performance impossible, then the doctrine of
frustration will be applied. This is because the said doctrine is applicable in
case of events which take place after the contract is made and for which
neither party will be held responsible nor can they prevent it from happening.
In the case of Syed Khursed Ali Vs. State of Orissa and Anr. (AIR
2007 Ori 56), the facts of the case states that there was no force majeure
clause in the agreement between the parties. The performance of the contract
later became impossible and unlawful as it depended on the issuance of a
certificate which was not granted by the government and the act was declared as
unlawful. It was held that the petitioner would not be responsible for payment
of any damages nor forfeiture of the security money deposited by him to the
opposite party as the doctrine of frustration as present in Section 56 of the
Indian Contract Act 1872, would apply to the said contract. It was clear from
the facts of the case that, the agreement entered between the parties became
impossible to perform as well as unlawful. Section 56 of the Indian Contract
Act, 1872, does not cover every case in which, neither of the parties are
responsible. Giving view to the nature and circumstances of the transaction and
implied terms, in this case,the performance of the contract on the part of the
petitioner became an impossibility and such impossibility can be brought within
the fold of “force majeure”.
While the doctrine of impossibility may
give some level of comfort to parties without force majeure provisions in
their contracts, all parties should try to address risk towards issues prior to
entering into agreements. For example, under a typical sale agreement, buyers
of commercial real estate in our given current situation may not be able to
sufficiently perform their due diligence on a target property because their
employees and third-party service providers cannot travel to the site. Having a
force majeure provision in a purchase and sale agreement could afford buyers an
extended time period to complete their diligence. This extension of the
diligence period would benefit buyers as an alternative to terminating the
agreement. At this point in time, we are all facing a great amount of ambiguity
with respect to the social and economic impact of the COVID-19 pandemic
outbreak; however, over the coming days and weeks, all parties in the real
estate industry should be prepared to assess the effects of this situation on
their contractual relationships.
The idiom of the force majeure clause
determines the remedies available to the parties. Some contracts may provide
for immediate termination of the contract upon the happening of the force
majeure event, while others may provide that the contract will be put on hold
until the force majeure event is resolved. Some contracts may provide for
limitations in time after which either party may terminate the agreement with
written notice to the other party for non-performance caused by the event is
extended. Some contracts will only allow for certain obligations to be
suspended and not all.
Hence in conclusion, we can safely say
that force majeure clauses help parties to avoid or at least lessen their
obligations in case of a supervening event which is beyond their control and
not attributable to them. Similarly, if these force majeure clauses are not
present in the contract then the concept of frustration of contract as present
in the common law and recognized by the statute (Section 56, the Indian
Contract Act) would operate to save the parties from any liability because of
the non-performance of a contract due to a supervening event which was not
attributable to any party during these challenging times.
Very informative and well articulated. Usually, a force majeure clause is taken very casually by many during drafting of any contract, but it is in times like these the importance and significance is realized.
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