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COVID-19 has been declared a pandemic by the World Health Organization, and in addition to the effects it has had on the health of thousands, it has far-reaching implications for the global economy. COVID-19 has disrupted work for millions and has major consequences for everyone who has signed a contract that they cannot comply with because of the current situation. COVID-19 may have consequences if you are buying or selling a property, building a new home or condo, paying a mortgage, or leasing a property.unication. We are taking these steps to protect the health of our clients, and to ensure that they have peace of mind, by knowing that these critical documents are in place to protect their loved ones.

Introduction to Force Majeure

Contracts are thoughtfully drafted to cover any number of situations and circumstances, and something called a ‘force majeure clause is meant to cover the most extreme conditions of all. The term ‘force majeure’ can be translated literally as a major or irresistible force, and is the common name for a clause in a contract dealing with so-called acts of god and other natural causes or disasters. The kind of events that are typically included in a force majeure clause are events such as hurricanes and earthquakes, riots and wars, and even epidemics and plagues.

While a force majeure clause can be drafted to include any number of situations, the types of circumstances are usually limited to a few headings or events which will be listed. This means that a force majeure clause will only apply if it mentions the circumstance within the contract.  Unfortunately, it is common for a force majeure clause to include physical acts like hurricanes or earthquakes, but exclude the terms epidemic or plague. Whether a force majeure clause applies to something like COVID-19 will depend largely on the definitions included in the contract. For example, if the contract uses a category, such as acts of God, then COVID-19 might be included if the heading lists examples that are similar in nature to the epidemic.  

When Does Force Majeure Apply?

To highlight what might be covered under a force majeure clause, think about an event like a boat cruise being cancelled by the operator. If the cruise is cancelled because the waves are slightly higher than normal, that circumstance is likely not covered by force majeure. If it is cancelled because there is a powerful storm that would make it more difficult to operate the boat, then this might be a case where such a clause would apply. If the cruise is cancelled because there is a category-4 hurricane, then this is exactly the sort of circumstance where force majeure is meant to apply.

The purpose of a force majeure clause is to determine the rights of the parties and to allocate risk and loss if all or a part of a contract cannot be performed because a specific event has occurred and made it impossible to perform. Force majeure clauses will say what a party may elect or is entitled to do if some unexpected event occurs. Force majeure clauses are meant to apply only to events that cannot be reasonably anticipated or controlled by the parties, which means they are meant to be the exception and not the rule.

Even when an event seems like it could be considered a force majeure, the courts have stated clearly that force majeure does not automatically apply to extenuating circumstances. That means that force majeure is only relevant if the parties have negotiated the clause and included it in the contract. If there is any disagreement about whether the clause is triggered or about the consequences for the parties, the court must review the specific contract and make a determination in each case. In contrast, the doctrine of frustration can be automatically applied by the court even if the contract does not have a related clause.

Implication of Force Majeure on Contracts

The consequences of a force majeure clause might vary greatly depending on the nature of the contract. For example, a force majeure clause might state that a party who is obligated to do something may have their obligation put on hold; or it might say a payment that has been paid will be refunded, or it might say that a party is not liable under the normal terms of the contract for not acting while the exceptional event is occurring. While it is common for a force majeure clause to suspend obligations, they are not forgiven or ignored and must be resumed when the party is able to do so. Further, the obligation to make payments that are required under a contract are very commonly excluded from force majeure clauses, meaning you will still have to pay a debt or obligation under a contract even if there is a force majeure clause. Each force majeure clause is different, and each clause will affect the status quo in a slightly different way.  

Introduction to Frustration

The doctrine of frustration is a much broader concept than force majeure and can apply in many circumstances. The doctrine refers to the fact that in certain circumstances the very purpose of a contract can be frustrated. A contract is said to be frustrated when an extreme event has occurred and made the circumstances in which the contract is to be performed so radically different than the circumstances which were contemplated when the contract was made, and as a result, the contract has been irreparably damaged. The doctrine of frustration exists because the courts have found it unjust to enforce a contract where the circumstances have drastically changed the rights and the liabilities of the parties far beyond what they agreed to. A situation where it is more difficult or expensive for a party to complete the contract does not mean the contract is frustrated; there must be circumstances where it would be truly unfair to expect the other party to complete the contract.  

The doctrine of frustration is determined by a 3-part test and applies when an event makes performing the contract substantially different than what the parties agreed to, the event was not considered by the parties when the contract was made, and the contract does not have a force majeure clause which applies. The party who is arguing that the contract has been frustrated is responsible for proving all three elements. The extreme event must not have been caused by either party and must be beyond the control of the parties.

Implication of Frustration on Contracts

When a contract is frustrated the remedy under the doctrine of frustration is that neither party must complete their obligations, and the contract will no longer operate. The parties can achieve a different outcome by mutual agreement after an extreme event has occurred, or they can negotiate and include a frustration clause in their contract. By negotiating and including a clause in the contract to govern what happens if an extreme event frustrates the contract, the parties can have certainty about their options and can achieve a better outcome than simply terminating the contract. Similarly to force majeure clauses, in the event a contract becomes frustrated, the parties could agree to suspend the performance of the contract or take any other measure that suits the parties.

Implications for Buying or Selling a Property

What would happen if the purchase of real estate was conditional upon some circumstances that now cannot be completed by one of the parties? If there is a force majeure clause in the contract, then the parties need to look to the clause to understand their rights and obligations.

What would happen if the government was closed, and the land registry office was unavailable to register a transfer? Government closures are often included in force majeure clauses, and the obligations of the parties may be controlled by such a clause. In such an unprecedented circumstance, the parties would have to make alternative arrangements to finalize the transaction, and they could look to a force majeure clause if there is one, or to the doctrine of frustration.  

What if the purchaser is now not able to close the deal because they will not have any business to fund the purchase? What if the vendor is not able to deliver vacant possession because they are quarantined, or unable to deliver an ongoing business as promised because the government ordered their closure? A force majeure clause may give a party the right to delay performance, and the doctrine of frustration may apply if the current conditions are radically different than those contemplated when the contract was signed.

Implication for Building a New Home or Condo

When you are buying a new home or condo, there is often a lengthy contract which deals with your obligations and the obligations of the builder. What happens if the builder is delayed because their workers are quarantined, or the construction industry is forced to stop work by the government? The contract for your new home or condo should be reviewed so that you can understand what you must do, and how any changes in circumstance will affect your rights.

Implication for Paying a Mortgage

Most mortgage contracts from major institutions do not include a force majeure clause, and the doctrine of frustration is not likely to apply. Even if a mortgage contract had a force majeure clause, as mentioned above, a force majeure clause will often only apply to obligations that do not involve payments. That means that a mortgage will very likely still need to be paid even under extreme circumstances.

Implication for a Commercial Lease

What happens if you are a tenant in a commercial lease, and your business is forced to close? Your lease may include a force majeure clause, or a frustration clause, a “hell or high water clause”, or any number of other clauses that will determine your rights. These provisions may provide you with options or reinforce the current obligations to your landlord.

What if you are a landlord who anticipates their tenants may be unable to fulfill their obligations? You should proactively review your lease so that you understand the obligations of your tenant, and what your rights are.

Goldstein Rosen & Rassos – We’re Here to Help

In these unprecedented times, many people’s lives have been turned upside down. It can be difficult to understand what steps you need to take, especially if you have a contract that has been impacted by COVID-19. You should know that Goldstein Rosen and Rassos has been providing legal services for over 65 years in real estate and commercial leases, and we can review your contract and help you understand your rights and obligations. Before you take any further action, contact us today, and we will faithfully represent your interests and protect your rights.    

COVID-19 has rapidly evolved and caused everyone to prioritize the health and well-being of themselves and their loved ones. We understand how difficult it can be to face great uncertainty and our own mortality. In these circumstances, it is more important than ever to have difficult conversations so that we are all prepared in the event that tragedy strikes us. At Goldstein Rosen and Rassos, we will guide you through the decisions that need to be made and can draft a Will and Powers of Attorney to protect you and your loved ones. Contact us today to discuss the next steps for making these essential documents.

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