FORCE MAJEURE IN TUMULTUOUS TIMES: IMPACT OF PANDEMIC ON REAL ESTATE COMMERCIAL CONTRACTS AND IMPOSSIBILITY OF PERFORMANCE

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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.

"This article is authored by Adv. Anisha Jadhav, (Associate at Solomon & Co., Advocates and Solicitors) you can reach out to her at anishajadhav1993@gmail.com."

"Special thanks to Adv. Shruti Jain (Law Officer, Lawyers Collective) for her contribution as an Editor for this Article."