Since the outbreak of COVID-19, parties to contracts have been carefully reviewing them to look at their options for obtaining relief from contractual obligations. Other parties to Brookfield Residential’s contracts, especially your real estate contracts, will likely seek relief from their contractual obligations and deadlines and point to the effects of COVID-19 as a cause. Can they do this?
What is a “Force Majeure” clause?
A force majeure clause is a contractual term that explains how events which are beyond the control of the parties will affect specific contractual obligations.
How is “Force Majeure” typically defined in your Offer to Purchase/Purchase and Sale Agreements?
In your Offer to Purchase/Purchase and Sale Agreements a “Force Majeure” requires (1) an occurrence that is beyond the control of the Purchaser, (2) that occurrence to affect or relate to the Purchaser’s Development, and (3) that occurrence to prevent the Purchase from meeting their Construction Commencement Deadline or their Construction Completion Deadline. Your agreements also expressly state that the Purchaser’s finances or general economic conditions do not trigger a “Force Majeure”:
“Force Majeure” means any occurrence which with respect to the Purchaser:
(i) is beyond the control of the Purchaser; and
(ii) affects or relates to the construction of the Development so as to prevent the Purchaser from completing its obligations in compliance with paragraphs 13(a) or 13(b) [this is there reference to the Construction Commencement Deadline and the Construction Completion Deadline];
and such occurrence shall constitute a Force Majeure only for so long as both conditions in (i) and (ii) apply. For greater certainty, and subject to the foregoing, such occurrence may include:
(iii) war, revolution, riot or insurrection;
(iv) strike, lock out, inability to procure materials or services, or other industrial disturbance;
(v) fire, lightning or floods, in each case which prevents construction in accordance with generally prevailing standards;
(vi) delays due to governmental authorities; or
(vii) delays due to weather but only if such weather related delays are generally experienced in the construction industry in the city in which the Development is being constructed during the time periods in question;
For further certainty, Force Majeure shall specifically exclude any matter relating to the Purchaser’s finances or general economic conditions;
Of course some of your agreements may have different language but the above is usual clause that you would expect to see.
Could COVID-19 fall under that Force Majeure clause?
Yes. If specific effects of COVID-19 on the Development are beyond the Purchaser’s control and prevent the Purchaser from meeting their obligations then a “Force Majeure” could be found under your contract. This finding would depend on the facts of each case and the reasons given by the Purchaser.
An example could be if the Government of Alberta imposes a mandatory business closure affecting the construction industry. At the time of writing, the Government of Alberta has included “construction work and services, including demolition services, in the industrial, commercial, institutional and residential sectors” on their essential services list.
Does a “Force Majeure” mean that a Purchaser can fail to meet their obligations for unlimited period of time?
No. The relief from meeting either the Construction Commencement Deadline or Construction Completion Deadline is only for the duration of the occurrence causing the “Force Majeure”. The Purchaser must notify Brookfield Residential in writing of the number of days extension being claimed or if it is ongoing, the date when the “Force Majeure” started. Brookfield Residential may either agree to these extensions or refer the decision to an arbitrator.
Brookfield Residential’s Offer to Purchase/Purchase and Sale Agreements explain how this time period is agreed to between Brookfield Residential and a Purchaser in the “Force Majeure Arbitration” clause:
If the Purchaser is claiming a Force Majeure, then the Purchaser shall, forthwith upon such alleged Force Majeure arising, notify the Vendor of the number of days extension to the Construction Commencement Deadline and/or the Construction Completion Deadline that the Purchaser is claiming due to Force Majeure, or in the case of a continuing Force Majeure, the commencement date of same. The Vendor may agree to such number of days extension or commencement date, as the case may be, as provided in the Purchaser’s notice or the Vendor may, if the Vendor chooses, have the number of days extension, if any, or the commencement date, which is justified by Force Majeure be determined by an arbitrator who shall be an individual from a nationally recognized and reputable construction contractor with experience in constructing developments similar to the Development. Such arbitration shall otherwise be conducted in accordance with the provisions of the Arbitration Act (Alberta), provided that:
- The identity of the single arbitrator shall be agreed upon between the Vendor and Purchaser within seven (7) days of either party notifying the other of the name of their choice of arbitrator. If the parties fail to so agree within such time, then the two (2) individuals so named shall designate the arbitrator within seven (7) days of the expiry of the first seven (7) day period;
- the arbitration hearing shall be called at such time and place as the arbitrator shall specify, being no later than fifteen (15) days after the appointment of the arbitrator;
- the arbitrator shall deliver its decision made in regard to the arbitration no later than fifteen (15) days following the close of the arbitration hearing; and
- the arbitrator’s decision shall be final and binding upon the parties to the fullest extent permitted by law.
What if your contract doesn’t include a “Force Majeure” clause?
Don’t be alarmed. Many of our contracts do not include this language to Brookfield Residential’s advantage. Historically the courts have been reluctant to intervene and to order relief from contractual obligations, especially in circumstances where both parties are sophisticated.
Without a “Force Majeure” clause in a contract there are other circumstances when parties to a contract may be relieved from their respective contractual obligations. On application, a court can declare that a contract should cease to exist under the principle of Frustration of Contract. This is a situation that arises after the formation of the contract that (1) is not caused by either party to the contract, (2) is not addressed by any provision in the contract, and (3) makes performance of the contract “radically different” from what was agreed to or impossible. Frustration is not caused by merely hardship, inconvenience or a material loss which makes performance more difficult. Brookfield Residential’s likely situation would be whether Purchaser could perform their obligations at large expense, such as increasing construction crews or construction hours, or if it is truly impossible to meet either the Construction Commencement Deadline or the Construction Completion Deadline. If the Principle of Frustration of Contract is found, then such a declaration has then effect of ending the contract entirely rather than postponing or changing obligations.
What should you do if a Purchaser suggests that there has been a “Force Majeure”?
If a request comes from a Purchaser or other contracting party for relief caused by COVID-19 then we suggest the following:
- Look at your contract. If there is a “Force Majeure” clause or a similar provision then read the circumstances that are covered by the clause.
- Request details from the other party claiming a delay or “Force Majeure”. Your agreements contemplate the Purchaser giving you such information to explain the anticipated length of the delay and the cause of the delay. This information should be specific and Brookfield Residential is entitled to specific information.
- Prepare a formal response. If Brookfield Residential accepts the “Force Majeure” then document this time period carefully and consider a contractual amendment. If Brookfield Residential and the Purchaser disagree on the existence or time frame of a “Force Majeure” then such a response will be an important record if the matter proceeds to arbitration.
We recommend that if such a request comes to Brookfield Residential then you consult with Field Law before sending a formal response to the Purchaser. Each situation will be fact specific, and these facts will be very important, especially if there is no “Force Majeure” clause in the agreement. If you have any questions about how to address contract issues regarding Force Majeure due to COVID-19 please contact us.