What is Force Majeure?
Force majeure, meaning “superior force” in French, refers to an unanticipated event which renders transaction participants unable to fill their contractual obligations.
Though a relatively arcane legal principle, the concept of force majeure has found sudden new relevance in light of the global COVID-19 pandemic – which itself is nothing short of a “superior force.”
But how does the concept of “superior force” relate to your real estate practice?
For force majeure to be invoked as a defense to enforcement by any of the participants in a real estate transaction, it needs to be covered by a provision in the underlying contract. Thus, the contract itself needs to dictate what is to occur in the instance of a “superior force” event. Currently, no widely adopted boilerplate force majeure clause in a lease or purchase agreement exists.
Consider a buyer and seller who enter into an agreement without a force majeure clause for the sale of the seller’s property. A sudden and unexpected disaster occurs causing the buyer to lose their employment prior to closing. The buyer backs out of the contract citing the force majeure defense.
Can the seller recover the difference between the agreed-to-price and what they later receive on a resale of the property to another buyer?
Yes! The buyer could not successfully raise a force majeure defense since they defaulted by failing to perform as agreed under the contract. The only way the buyer could successfully raise this defense is if the contract contained a tightly worded provision covering the release of performance obligations under the circumstances of the force majeure event.
This scenario is modeled after Allen v. Enomoto (1964). Here, the buyer entered into a purchase agreement with a seller and made a good-faith deposit towards the purchase price. The buyer refused to complete the transaction after later discovering the lot area was different than represented. The seller sold the property three months later to another buyer at an amount below the price agreed to by the original buyer and incurred additional expenses on the property while holding it for resale.
Here, the court ruled the seller was entitled to an offset against the breaching buyer’s deposit for any recoverable money losses incurred.
In practice, sellers need to account for actual money losses caused by the buyer’s breach since a forfeiture of deposits is not allowed. Depending on the amount of the seller’s total recoverable losses on the resale, the buyer’s deposit will be partially or totally offset by the amount of the seller’s losses caused by the breaching buyer.
Price-to-value as a money loss
When a seller decides to resell the property after the buyer breaches their purchase agreement and the property’s value has declined below the price set in the purchase agreement, the seller has incurred a loss in value which is recoverable from the buyer. However, the amount of future value decline recoverable after the buyer’s breach is limited to two time periods:
- the initial decline in value below the purchase price during the period before the breach, which is recoverable as general damagesor more commonly called a price-to-value loss; and
- any further decline in value after the breach, which is recoverable only if the buyer interfereswith the seller’s resale effort, also called special damages or more commonly called additional damages, damages being money. [Calif. Civil Code §3307]
The price-to-value loss on the date of breach is recoverable by the seller whether the property is retained, remarketed or resold.
How do we predict unforeseeable events?
No proper protocols currently exist for when the effects of a force majeure event reach a national or global scale. However, the International Chamber of Commerce (ICC) lists the following as potential force majeure events:
- war;
- armed conflict;
- hostilities;
- terrorism ;
- acts of God;
- plague;
- natural disasters, including violent storms, volcanic activity, and tsunamis;
- explosion; and
- fire and general labor disturbance such as a strike or boycott.
But even the occurrence of one of these events does not in and of itself establish a force majeure defense for a claim of money based on a breach. The underlying contract needs to clearly define the “superior force” which would excuse performance. The events broadly listed by the ICC are deemed those which may be proved as legitimately unforeseeable, though do not provide surefire coverage for a force majeure defense. Any event falling outside those specifically listed items is deemed foreseeable and will not likely excuse performance of an agreement that is impossible to now perform.
Editor’s note – As a matter of policy, RPI (Realty Publications, Inc.) forms do not include a force majeure provision. Generally, purchase agreements have contingency provisions that are triggered when disaster hits, such as a financing contingency or condition of the property at time of closing.
History behind the Word
The term force majeure has both roots in England and France. Force majeure primarily derives from principles in French civil law centered on the Napoleonic Code. The concepts behind force majeure have also been further clarified in England.
In 1863, an English court took up the case of Taylor v. Caldwell where justices decided that circumstances beyond the control of two parties excused performance of their contract.
Here, an event organizer entered into a contract with a venue owner to rent a music hall for several days during the summer of 1861. The organizer agreed to pay the venue owner each day the event was held. Before the first scheduled event took place, an accidental fire destroyed the music hall.
The contract entered into by both parties did not include a clause for the situation of total destruction. The court ruled that when something is essential to the performance of a contract – such as the physical existence of the structure – and that essential element is destroyed through no fault of the transaction participants, the contracting participants are freed from an obligation to deliver.
Since this court case, the force majeure defense has found its way across the ocean to the United States. Though the case of Taylor v. Caldwell has had a lasting impact on both countries, the present contract-law theory of force majeure provides significantly less protection.
The coronavirus, in particular, is calling the force majeure defense clause to light due to the uncertainty of current circumstances. However, for the clause to be successfully argued in court, a contract needs to include “epidemic” or “pandemic” in its qualifying list of events, and clearly enumerate the scale and circumstances of the event.