“Yet, he ought to pay his rent.”
posted by Lawrence Cunningham
“Yet, he ought to pay his rent,” is a famous legal conclusion from the grand case of Paradine v. Jane evoked by Mark Edwards recently in this blog, a wonderful early specimen in the law denying excuse from contractual obligation due to supervening events. Later chestnuts (like Taylor v. Caldwell to Krell v. Henry) relax the rigid stance denying impossibility, impracticability or frustration of purpose as excuses from contractual obligation, but only if the risks arising from a supervening event (fire, flood, riot, disease and the like) are not allocated, expressly or implicitly, by contract.
The common law’s navigation of these doctrines prompt parties to include in contracts express provisions excusing performance of obligations upon the occurrence or non-occurrence of stated supervening events. Parties can include any sorts of events they wish. A common example of the kinds of clauses that result, often generically described as force majeure clauses, follows:
“If either party to this contract shall be delayed or prevented from the performance of any obligation through no fault of their own by reason of labor disputes, inability to procure materials, failure of utility service, restrictive governmental laws or regulations, riots, insurrection, war, adverse weather, Acts of God, or other similar causes beyond the control of such party, the performance of such obligation shall be excused for the period of the delay.”
Pending in New York court is a claim that a similar sort of clause enables the real estate developer, Donald Trump, and companies he controls, to delay repayment of obligations for borrowed money to Deutche Bank, and a syndicate of other banks. The borrowers want a declaratory judgment that prevailing real estate market conditions are within such a clause and beyond the borrowers’ control. Accordingly, they want to lawfully delay repayment of a $40 million installment due last month under a $640 million construction loan. The substantive argument is that sales of condo and hotel units the construction loan supported have failed to materialize as anticipated (only $204 million have closed and $353 million are under contract).
The claim is dubious under New York law, reflected in a leading case, which is also a Contracts classroom standard, Kel Kim Corp v. Central Markets, 519 N.E. 295 (N.Y. 1987). A lessee sought a declaratory judgment to be excused from an obligation to procure insurance on leased premises in light of the liability insurance crisis of the 1980s that made it essentially impossible to buy such insurance. The New York Court of Appeals, affirming both a trial court and intermediate appellate court, rejected the lessee’s common law impossibility and contractual force majeure arguments.
As to the common law impossibility claim, the general rule is that contracting parties agree to perform or pay damages even if unforeseen events make that burdensome. This stance is relaxed under the impossibility doctrine to excuse performance only in a way that reflects the contractual risk allocation the parties manifestly contemplated. This requires such things as destruction of the subject matter of the contract or that the means of performance is “objectively impossible.” It also requires proving that the event could not have been foreseen or guarded against by contract. In Kel Kim, the lessee did not meet these requirements for excuse under the doctrine of impossibility. After all, inability to obtain insurance could have been foreseen and guarded against in the contract.
Nor was the lessee’s claim within the scope of the force majeure clause for similar reasons. Ordinarily, only if an event is expressly within such a clause can it be invoked to excuse performance. The Kel Kim contract’s clause, the one excerpted above, did not specifically list inability to obtain insurance. Listed events deal with day to day commercial operations. The catch all phrase does not expand that class to include insurance. Procuring insurance is not about frustrated expectations in daily operations. It is about the lessor’s bargained for protection of its unrelated economic interest where the lessee continues to operate a particular business at the site posing particular liability risks.
The only way Trump’s claim against Deutche Bank is likely to succeed is if the loan agreement’s force majeure clause contains something like the following revision of the Kel Kim clause (changes in bold):
“If Borrowers shall be delayed or prevented from the performance of any obligation through no fault of their own by reason of labor disputes, inability to procure materials, failure of utility service, restrictive governmental laws or regulations, riots, insurrection, war, adverse weather, Acts of God, material deterioration in the market value of the property constructed using the proceeds of this loan, or other similar causes beyond the control of such party, the performance of such obligation shall be excused for the period of the delay.”
I haven’t been able to find the Trump-Deutche loan agreement and definitive conclusions obviously depend on reading and interpreting it.* It would be shocking, however, if a commercial bank would agree to the allocation of risks manifested in the foregoing language or anything remotely like it. Donald Trump ought to repay his loan as due.
* [As an aside, it would be nice when journalists in the modern era quote from court documents and other materials that may be costly to obtain, to provide a link to enable others access to them at no or little cost.]
December 10, 2008 at 11:45 am
Posted in: Contract Law & Beyond
Print This Post
Responses (2)
Michael Lee - December 10, 2008 at 3:44 pm
How is Trump’s situation different from that of every other defaulting mortgagee out there?
Dave - December 10, 2008 at 4:12 pm
Michael-
Trump would probably say “they don’t have a force majeure clause,” as he did recently in response to whether Trump Tower buyers should be allowed to delay their condo payments to him.
http://dealbook.blogs.nytimes.com/2008/12/05/trump-sees-act-of-god-in-recession/
Leave a Reply