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
