Weitz Commercial - 150 Lake Street S; Ste 216 - Kirkland, WA - (206) 306-4034

Wednesday, August 19, 2020

Washington Options for Lease negotiation for COVID.






Force Majeure

What is force majeure?

Unlike many countries, English common law provides no universal concept or definition of force majeure, which instead operates only to the extent contractually agreed. Accordingly, the ability of a party to invoke force majeure (and the effect this will have on the contract in question) will depend on the presence of a force majeure clause and its terms within your lease or contractual agreement.

Though each force majeure clause may vary and must be considered on its own terms, there are various common elements.

NOTE THE TYPICAL COMMERCIAL BROKERAGE ASSOCIATION (CBA) LEASE DOES HAVE A PROVISION FOR GOVERNMENTAL INTERFERENCE. 

Typical elements of force majeure

The onus is on the party relying on the clause to demonstrate that it has been engaged in the particular factual circumstances.1

1.    Occurrence of event

First, the party suggesting force majeure will always need to establish that one of the prescribed events has occurred. Typically, such events include such as war, natural disaster or acts of god will be included. It is not uncommon for a pandemic or epidemic to be included as a qualifying event, which plainly would cover the outbreak of COVID-19. Clauses may also list a change in law or compliance with any government regulation or order. These triggers are particularly relevant in the current circumstances, where many governments are imposing unprecedented restrictions in response to COVID-19.

2.    Impact on performance

Once established that a trigger event has occurred, the party seeking to rely on the force majeure clause must also show that the event has impeded their ability to perform their obligations to the necessary degree.

Where there is a requirement for the event to have “prevented” performance, the defaulting party will need to demonstrate that it has become physically or legally impossible to perform, and not merely more difficult or unprofitable.

3.    Sole cause

As regards the necessary extent of the causal link between the force majeure event and a party’s inability to perform their contractual obligations, the defaulting party must demonstrate that the event is the sole and operative cause of the impediment.11

Causation is likely to be a heavily disputed factor. If a party was already facing issues that would impact their obligations, it may be difficult to prove that the force majeure event was the sole cause.

4.    Mitigation

Force majeure clauses will commonly require a party to mitigate the effects of the trigger event, for example by imposing a duty to use all reasonable endeavours to do so. What constitutes reasonable endeavours is fact-specific and will vary depending on the type of business and the surrounding circumstances.

5.    Contractual consequences

The consequences of a party validly calling force majeure will depend on the wording of the clause. The clause may entitle a party to suspend or extend time for performance, or allow for termination of the contract. It is common for a force majeure clause to allow suspension of obligations for a certain period of time, after which one or both of the parties have the option to terminate the contract.

In addition, force majeure clauses often include notice or other procedural requirements

Frustration

What is frustration?

In the absence of a force majeure clause, contracting parties may consider relying on the common-law doctrine of frustration {of purpose}. Frustration discharges a contract where an event occurs that renders it physically or commercially impossible to perform, or transforms the obligation to perform into one radically different than envisaged at the time of contracting.

Elements of frustration

The test

Frustration applies only in extreme scenarios, and the threshold for establishing that a contract is frustrated is very high. Though there is no definitive test for frustration, generally a contract may be frustrated where:

·         the frustrating event occurs after the contract has been formed;

·         the event is beyond what was contemplated by the parties on entering the contract and is so fundamental that it strikes the root of the contract;

·         neither party is at fault; and

·         the event renders performance of the contract impossible, illegal or radically different from that contemplated by the parties at the time they entered into the contract.

For frustration to occur, it must be demonstrated that the event affects the main purpose of the contract.

All relevant factors, including the wider contract and factual circumstances, will be taken into account by the court when considering whether a frustrating event has occurred.

Events leading to Frustration

Types of events that have been to held to frustrate a contract include war, incapacity or death, cancellation of an event, a change in law, or destruction of subject matter.

COVID-19 could be considered a frustrating event, however, it will more likely be the consequences flowing from the COVID-19 outbreak that qualify (ie. Government Restrictions).

Unforeesable

Frustration requires that the supervening event was unforeseeable. The courts will take into account all factors when considering the parties’ knowledge, expectations and assumptions regarding the risk that a particular event might occur at the time of contracting.16

Impossibility

Generally, to prove that a contract has been frustrated, performance of contractual obligations must be shown to be genuinely impossible. It is not enough that obligations have become extremely difficult, even if they would result in devastating hardship on a party. If any manner of performance remains an option, this must be taken, regardless of the burden it would inflict on the party.

Many of the effects and the measures introduced as result of COVID-19 will be temporary. Depending on the nature of the contract, it may therefore be difficult (though not impossible) to show that performance has become genuinely impossible and not merely temporarily delayed.

Consequences of frustration

Where frustration is successfully invoked, the contract is automatically terminated and all parties are released from their obligations. As the contract is terminated immediately, the parties are not restored to their pre-contractual position. This may result in an unfair or uncommercial outcome. If the Law Reform (Frustrated Contracts) Act 1942 does not apply, then money paid before the frustrating event is only recoverable where there has been total failure of consideration.17

The Act applies to commercial contracts, with the exception of contracts that have expressly excluded it. Certain shipping, insurance and perishable goods contracts also fall outside the scope of the Act.

Where the Act applies, money paid before the frustrating event can be recovered and unpaid sums that are due cease to be payable.

A party may also be able to retain an amount of the money paid to cover incurred expenses. Additionally, the court may require a party to pay a just sum for a valuable benefit received under the contract.

Relationship with force majeure

Where a contract contains a force majeure clause, it is unlikely the parties will be able to argue frustration. This is because the parties will be viewed as having already made express provision for the consequences of a particular supervening event in the contract itself.

However, because force majeure clauses are viewed in a restrictive way, the courts will need to be satisfied that the wording of the force majeure clause covering the event is “full and complete” before concluding that frustration is not applicable.

Conclusion

If your business has been effected by COVID regulations, you may have options to postpone/ stop your lease obligations. You can reach us directly at:

Weitz Commercial

150 Lake Street S; Ste 216

Kirkland, WA 98033

Scott@WeitzCommercial.com

T: (206) 306-4034

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