C’est Impossible: What if my contract doesn’t have a Force Majeure clause?
March 30, 2020
Force Majeure articles have abounded in this pandemic, and if there is one lesson contract drafters will have learned from it, it’s that they should try to or be prepared to negotiate a Force Majeure clause in every contract.
But that’s little help in the present, especially for tenants and buyers whose contracts do not already have a Force Majeure clause to allow them to delay things like paying rent or closing on a piece of property.
Force Majeure articles tend to mention in passing that other common law defenses to performing under a contract exist but little more than that. If paying rent will be a strain, or closing on real property will be a stretch, here are some ideas to keep in the back of your mind.
The Doctrine of Impossibility
In North Carolina, the doctrine of impossibility is a common law excuse to a promisor’s performance under a contract. The doctrine of impossibility requires just that: it is impossible to perform one’s contractual obligation. Generally, the impossibility must be caused by either government action or an Act of God. (Acts of God under North Carolina law have generally been likened to extremely rare and disastrous climatic events.)
In a contract for the purchase of real estate, the buyer’s obligation is to get to closing by providing the purchase price to the seller. The obligation of the seller is to provide a deed to the buyer to convey the real property, and this can only happen if the deed is recorded.
For the doctrine of impossibility to apply in the context of the purchase and sale of real estate, something unforeseeable must have either made it impossible for the buyer to access his funds for the purchase of the property.
Keep in mind that unless the contract has a financing contingency, impossibility will not exist just because the buyer fails to obtain a loan. Even with a financing contingency, unless the contract explicitly provides otherwise, the buyer’s failure to secure financing would likely only entitle the buyer to back out of the contract and receive a refund of some or all of the earnest money.
Another impossibility in this context would be if the conveyance deed could not be recorded. The vast majority of law firms use an electronic filing service nowadays, but the failure of this service isn’t enough. The register of deeds must be closed or forbidden from recording any new instruments on the closing date.
In the landlord-tenant context, the most common material obligation of leases is of course for the tenant to timely pay rent to the landlord. To excuse this obligation, an unforeseeable government action or natural disaster must make it impossible for the tenant to pay rent. If, for instance, a government order were put in place forbidding banks from disbursing money from its clients’ accounts, for whatever reason, this would likely qualify. Or, if a natural disaster wiped out your bank’s operational capabilities so that you were unable to make a withdrawal, this could count, as well.
The Doctrine of Frustration of Purpose
The doctrine of frustration of purpose doesn’t require impossibility to provide an excuse, but it does require that the thing that a person bargained for be substantially compromised by an unforeseeable event. In other words, the very purpose for which a promise was made (the “consideration”) is now gone or substantially compromised; the consideration has failed.
For one buying improved real estate, a building material to the deal may be condemned. Or, the parties may have agreed that the buyer was buying land for timber, and a natural disaster suddenly wiped out the existing timber and ability to grow timber. In the landlord-tenant context, our courts have been relatively straightforward that the premises itself must be unusable for the purposes acknowledged by the parties. These could be arguable examples where frustration of purpose comes into play.
Keep in mind that frustration of purpose does not apply if the value of the thing you bargained for suddenly decreases. Courts are clear that a failure of consideration does not happen just because the consideration ends up being worth less than you thought it was or would be. So, even though a pandemic has caused widespread uncertainty in our economy, and we may find that we have promised to pay a price for something that is all of a sudden not as valuable, unfortunately this will not be a good enough reason to avoid paying that price (legally speaking).
Unlike most Force Majeure clauses, common law excuses for failing to perform do not usually postpone the time within which one has to act. Rather, they are just that: an excuse to non-performance. In the event that a promisor fails to perform, the promisee’s remedy is to terminate the contract. Without an excuse, the promisor owes the promisee money. With an excuse, the promisor does not.
Buying Real Property
A number of executive orders have been put in place in North Carolina, from various the municipal and county governments to the state level. These orders have placed constraints on people’s movements, but commerce is still encouraged to continue where possible. As such, governmental offices are still open and providing services. We are not aware of any office of a register of deeds which has closed temporarily or refuses to record new instruments. If the outbreak becomes bad enough, it would not be surprising if further orders started limiting governmental services, such as the services of the registrar, which are unrelated to public health and safety. In these circumstances, for instance, impossibility may be a defense for a buyer who cannot go through with a purchase.
Renting Real Property
As with a buyer of real property, it is conceivable that a governmental order or an Act of God will make it impossible for the tenant to get rent to the landlord in the time required by the lease. However, with widespread online banking availability and the push for commerce to continue even during this crisis, it seems that there would be very few instances in which impossibility is truly at play for a tenant due to the pandemic.
Frustration of purpose in the landlord-tenant context may be on the horizon related to the pandemic. A governmental order, for instance, may prohibit the use of the leased premises for a time for the premises to undergo sterilization and quarantine. This may effectively “destroy” the purpose for which the tenant negotiated the lease to qualify.
While impossibility and frustration of purpose may provide excuses for some buyers or tenants at some point in the future if the outbreak worsens, most are going to find these doctrines unhelpful in the present. Still, every contractual situation is unique. If you have a question about whether you have a legal justification to avoid paying a seller of land or a landlord money during this time, please give us a call. We will be happy to discuss your situation and craft a plan that will help put you in the best financial position you can be in.