Cayman Islands: Commercial Leases And COVID-19: Force Majeure, Frustration and Illegality

As communities at large look towards their physical health, businesses are looking at their financial health. One question which has arisen is whether a contract containing a Force Majeure clause is, or can be, triggered by the COVID-19 pandemic. Further, if there is no such clause in the contract can one of the common law doctrines apply, such as frustration and illegality, due to a supervening event.

Force Majeure Clause

Force Majeure clauses are usually contained in commercial type leases, but not always. The contract/lease should be considered in the first instance and, if present within the contract, then it will become a question of construction. These types of clauses are generally recognizable but they do not always state what they are. These clauses are generally present to alter one or various rights and obligations of the contracting parties when one of the events detailed in the clause occurs or, depending on the construction of the clause, some other supervening event occurs. The event prevents the parties from complying with their obligations under the contract and the clause may set out what is supposed to happen at that point between the parties.

These types of clauses can be drafted very differently and, the consequences of this, can result in various possible outcomes for the parties. The clauses can be written broadly and/or be more specific.

Force Majeure is contract based as opposed to a general common law doctrine, described in 1902 in Lebeaupin v Richard Crispin and Company [1920] 2 K.B. 714 as:

The general approach taken by the Courts is one which is viewed as fairly restrictive, which likely stems from the Courts' general restrictive approach throughout the years to exemption type clauses. In the Cayman Islands, this may still be the approach because, unlike in some other jurisdictions, Cayman does not necessarily have the statutory restrictions placed on these types of clauses. If they are not restricted by implied statutory provisions then the Courts will likely maintain the restrictive approach, when considering reliance on the clause. It is highly likely that in Cayman the Courts will first look to the common law doctrine of frustration and how it has been applied and then interpret the Force Majeure clause. Certainly the Courts would have no shortage of case law to refer to from other jurisdictions, given that Force Majeure clauses have been well litigated.

The burden of proof lies with the party who seeks to rely on the clause. They will have to prove:

• That the clause should apply in light of COVID-19
• It is beyond the control of the parties
• Inability to mitigate - this will be timing and fact specific
• Foreseeability may or may not be a consideration (depending on the contract)
• Relevant Notice (whether there is a requirement to serve notice when seeking to rely on the force majeure clause)

There is no reason, unless the contract specifically provides something else, why the parties cannot agree to suspend performance on both sides during this pandemic or 'forgive' non-performance for a period without specifically bringing the lease to an end. Whereas the other common law doctrines bring the contract itself to an end.

Going forward parties to a contract may wish to be more specific with the allocation of risk in the lease as well as when the clause could be triggered.

No Force Majeure Clause

If there is no such clause in the contract then the question no longer focuses on the construction of the contract. Instead the focus reverts back to legal principles and common law cases applying the other doctrines.

Frustration

This doctrine has only been applied in a limited way by the Courts historically. The case of Davis Contractors Ltd v Fareham UDC [1956] AC 696 is still the defining case in relation to what constitutes frustration, being that:

• it was a supervening event - neither party defaulted (no blame on either party)
• parties have become incapable of performing because performance would be radically different from what was originally undertaken by the parties under the contract.

The lease/contract should be explored at this point.

There are similarities to Force Majeure in that:

• foreseeability is a component (the event must be unforeseen)
• it renders the contract impossible to perform or changes the main purpose of the contract
• there must be a supervening event for which neither party is responsible

Whereas a Force Majeure clause can end a contract in a specific way (allocating risk and loss in a specific way between the parties), the doctrine of frustration will likely mean that losses incurred will crystalize at termination and the respective parties will shoulder whatever the loss is, at that point. Landlords in this scenario are more likely to shoulder more of the financial loss e.g. unpaid rent/utilities and so on.

In some jurisdictions, including Cayman, there are statutes which protect parties from the 'fall out' of the application of the doctrine of frustration e.g. statute allocating obligations and losses. It may still be possible to recover monies or have the Court address apportionment of risk and loss/costs when a contract has been found to be frustrated or impossible to perform. In Cayman there is the Contracts Law (1996 Revision) under which a statutory claim may be made. Sections 5 and 6 of the Contracts Law potentially allow for claims for monies owed, prior to discharge of the contract and claims for non-monetary benefits as a result of the contract having been found to be frustrated. This is an unsettled area of common law and certain types of contracts are excluded e.g. insurance contracts. However, the common law may again come into play, via a claim for unjust enrichment, when a certain type of contract is excluded under this law.

There is much case law surrounding the application and extent, not only of Force Majeure clauses but the other doctrines as well. It must be borne in mind that every case will turn on its own facts and the length of the COVID-19 pandemic compared to the length of the lease will be a factor considered.

Illegality (some other supervening event)

The doctrine of illegality, if the supervening event results in a contract being illegal - then performance is illegal. However, the facts of the case are important. If a contract is merely partially unable to be performed or the contract is more difficult to perform – this is not adequate to satisfy the strict criteria which would allow the reliance on this doctrine. Again there is much case law surrounding the application of this doctrine.

Practical Considerations

The Landlord at this time should:

1. Look to the Lease
2. Is there a Force Majeure clause and what does it say?
3. What are the Landlord's obligations and what are the Tenant's usual remedies in relation to these?
4. Explore the possible areas where the Tenant may seek to rely on any such clause
5. Consider cover under any insurance policy
6. If the property is mortgaged – speak to the lender

The Tenant at this time should:

1. Look to the Lease
2. Is there a Force Majeure clause and what does it say?
3. What are the Tenant's obligations and what are the Landlord's usual remedies in relation to these?
4. Explore the possible areas where the Landlord may seek to rely on any such clause
5. Consider abatement clauses and other restrictions clauses e.g. where it is illegal to carry on business in this case due to Government restrictions
6. Other clauses which allow cessation or reduction in rent payable and the circumstances surrounding the use of such clauses
7. Consider cover under any insurance policy (may cover loss of income)
8. If the business has a loan – speak to the lender

Conclusion

If there is no Force Majeure clause in the lease, HSM strongly suggests you seek legal advice and our team is ready to assist you through this time of uncertainty.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.