How To Guard Against “Superior Forces” In Our Leases, Mortgages, And Other Contracts; No, This Isn’t Science Fiction. It’s Real Estate Law.

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How familiar are you with Vis Major clauses in leases, mortgages, and other contracts? Our guess is: probably not very familiar. Vis Major is Latin for “Superior Force”; in French, that’s: Force Majeure. Before we explore “what” might constitute a superior force and other facets of the force majeure concept, we’ll work on “why” – “why” do we include such provisions into our documents? Allow us to ramble somewhat.

Contracts are a vehicle by which the parties allocate the risk of expected and unexpected events. Force Majeure provisions deal with the unexpected ones. Though many colleagues disagree with us, Ruminations thinks they add certainty to the parties’ agreement. Our premise is that without them, if a party is unable to perform its obligations on time, the result can be draconian and unwanted (at least under the parties’ thinking at the time of signing). Though disappointing, most delays in performance are tolerable when the parties want to Get The Deal Done. The risk, however, is that as time progresses, one party or the other may not be as keen to continue with the contract as it was at the outset.

Why do we say, “Draconian”? That’s because, absent some relief valve, the choices as to the continuing existence of a contract might be: “take it or leave it.” That’s the way it was under common law until the 1863 English court case of Taylor v. Caldwell.

What had happened was that Caldwell had rented a music hall to Taylor for specific concert dates, but the hall then burned to the ground. Taylor sued for damages and would have been successful had Judge Blackburn not established the “impossibility of performance” defense. The fire was unintentional and Caldwell was excused from its obligation to provide the designated venue or even a replacement one. Prior to 1863, where a contract did not allocate the risk of destruction by fire, a fire beyond the control of a party (think, Force Majeure) did not excuse performance. Since then, under common law, contracting parties can raise the defense of “impossibility of performance.” Basically, if a party meets the defense’s necessary elements, it will be excused from its contract obligations – all or nothing.

Sometimes, performance is not actually “impossible,” but merely “impractical.” Impossibility can be assessed on an objective basis – you don’t need to look through the eyes of one party or the other. If something is truly impossible, it will look that way to any reasonable person. On the other hand, when something is legally impractical, you are saying that it is so burdensome that a court should not require a party to fulfill its side of the agreement. That’s a “subjective” test – you look through the eyes of the actual burdened party.

The predecessor to what is now called the Doctrine of Impracticality is the Canon law “Doctrine of Changed Circumstances.” Thomas Aquinas summed it up as follows: “a promise is akin to a law imposed upon the self and if the conditions that caused that imposition changed, the promisor should not be bound to circumstances that were not intended.” It took until the coronation of King Edward VII was cancelled in 1903 for “frustration of purpose” to be a valid defense. That year, the English case of Krell v. Henry validated the defense of “frustration of purpose,” a very close cousin to impracticality. Henry had rented Krell’s apartment for two days during daylight hours, specifically so that Henry could watch the coronation from the window. The King got sick and even though the apartment remained available, Henry no longer had use for it. It wasn’t impossible for Henry to use the apartment, just that the purpose for which he rented it, one well known to the “landlord,” had been frustrated through no fault of either party. This case led to a variation in the United States, the Doctrine of Commercial Impracticality.

What each of the doctrines of impossibility and impracticality has in common is that they result from the occurrence of unexpected circumstance beyond the reasonable control of the party seeking to be excused; call such circumstances, major forces – events of Force Majeure.

When we use a force majeure provision, we are saying that we DON’T want to be excused from performing altogether – we want to preserve the contract, but we need more time to perform. Yes, we are allocating risk – the risk of an uncontrollable impediment to finishing a task on time. We are saying that when a “major force” pops up, the parties don’t want “out.” They still want to consummate the transaction.

OK, enough of that history or stuff such as that. How does this “force majeure” thing work in practice? Here’s is a typical contract’s long-form provision (from a lease). It isn’t being offered as legal advice, just to illustrate the concepts involved:

“Force Majeure,” as used herein, means delays resulting from causes beyond the reasonable control of the other party, including, without limitation, any delay caused by any action, inaction, order, ruling, moratorium, regulation, statute, condition or other decision of any private party or governmental agency having jurisdiction over any portion of the Project, over the construction anticipated to occur thereon or over any uses thereof, or by delays in inspections or in issuing approvals by private parties or permits by governmental agencies, or by fire, flood, inclement weather, strikes, lockouts or other labor or industrial disturbance (whether or not on the part of agents or employees of either party hereto engaged in the construction of the Premises), civil disturbance, order of any government, court or regulatory body claiming jurisdiction or otherwise, act of public enemy, war, riot, sabotage, blockage, embargo, failure or inability to secure materials, supplies or labor through ordinary sources by reason of shortages or priority, discovery of hazardous or toxic materials, earthquake, or other natural disaster, delays caused by any dispute resolution process, or any cause whatsoever beyond the reasonable control (excluding financial inability) of the party whose performance is required, or any of its contractors or other representatives, whether or not similar to any of the causes hereinabove stated. Force Majeure shall not include the inability to pay a monetary obligation other than one resulting from a bank holiday or similar condition declared by the federal government or a state government.

One nice thing about being able to pull this particular sample provision out of our files is that we don’t have to separately list the kinds of potential causes for delay that might be “beyond the reasonable control of a party” because the most commonly cited ones are listed above. If you have others, please share them with all of us by posting a comment to this blog entry.

Few things in life are without controversy. [In fact we’ve been looking for at least one such “thing,” thus far without success; but, hope springs eternal.] So, feel free to argue about the list in our sample clause. We’ll start.

The nature of unpredictable items is that some are so unpredictable as to defy listing. That’s why the provision says, “including, but not limited to.” Seems reasonable, huh? Donald Trump thought so in Donald J. Trump v. Deutsche Bank Trust Company Americas, Index No. 26841/08 (N.Y. Supr. Ct., Queens Cty. 2008) when he asserted that the economic downturn was extraordinary and should be construed as a “force majeure” event. In his argument, he claimed that a loan maturity date should have been extended because of the financial crisis. There were two noteworthy aspects of his argument. First, this may be the only example of his not claiming the ability to control everything; and, second – he lost. To discourage this sort of claim, the inclusion of a carve-out eliminating the “inability to obtain financing” might be useful.

The Trump example teaches us a general lesson. A well-drafted force majeure provision may need “carve-outs,” items, the occurrence of which will NOT excuse a delay. The example within the example above deals with “the inability to pay a monetary obligation.” Other examples may be “inability to obtain financing,” a “labor lockout initiated by the party” or “inability to obtain a tenant.”

As innocent as it might seem to grant a force majeure delay to a party who couldn’t get the paving done by reason of an overwhelming snow storm, what if the paving could have been done at any time in the three months preceding the snowstorm rather than wait until the last minute? Certainly, the storm was beyond the reasonable control of the “paving” party, but was the delay? Yes, even the “boilerplate” needs to be understood and adapted to predictable situations. If a paving deadline is critical, don’t let force majeure allow for a delay.

Then, there are “exceptions to the exceptions.” Again, look at the very last sentence of the example. Even when the inability to pay money will not excuse timely performance, there are times when such inability is truly outside of a parties’ control.

As valuable as the force majeure concept may be, and as reasonable as it might be to allow a party to delay its performance by reason of an event of force majeure, don’t forget that some “outside deadlines” are truly deadlines, not like all of the artificial deadlines “invented” by negotiators “just in case.” If something REALLY must be finished by a given date, say so. Say, “but no delay shall extend the ‘Premises Delivery Date’ beyond [date],” perhaps adding “time being of the essence.” Basically, regardless of fault, some things must happen by a given date. You can argue whether a party should be liable for damages if its failure to complete its performance resulted from an event of force majeure, but if you don’t include a carve-out for a “drop dead” date, you won’t even have the need to talk about “damages” because there wouldn’t be any legally cognizable ones.

Events of force majeure don’t arise as often as parties claim. More critically, parties often attempt to claim the benefit of a force majeure contract provision “way after the (alleged) fact.” Even if the claim is legitimate, the other party should know about the claim at the earliest practical time. That’s why the following sample provision is seen:

The provisions of this Section shall only be applicable provided the delayed party complies with the following requirements:

(i) when the delayed party has knowledge of the existence of such occurrence, it shall give prompt written notice thereof to the other party; and

(ii) the delayed party shall diligently [or take commercially reasonable steps to] attempt to remove, resolve or otherwise eliminate such occurrence while keeping the other party advised with respect thereto, and shall commence performance of its obligations hereunder immediately upon such removal, resolution, or elimination.

Thinking that’s pretty self-explanatory, Ruminations moves on.

Lastly, if we’ve done our job well, readers will understand why we didn’t offer the following, very commonly seen “total, self-contained” provision as an example:

If either party shall be delayed, hindered, or prevented from performance of any of its obligations by reason of Force Majeure, the time for performance of such obligations shall be extended for the period of such delay.

How’d we do? Tell us by adding a comment to this blog posting. There’s a place to click just below the title to this blog. Share your war stories. Suggest carve-outs. Help Ruminations keep the discussion going. We average over 15 comments (here and on Linked In) for every blog entry. Our readers are the greatest! Thank you.

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Comments

  1. Ira, you omitted “Acts of God’ which is defined as any catastrophic event that an insurance company will not insure.

  2. Worth reading
    Thanks

  3. What language would you use to specifically exclude the financial crisis?

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