Lenders and real estate developers are fully aware that Donald Trump has invoked the current financial crisis as a means to excuse payment on a real estate loan, under the pretext of "force majeure".
Mr. Trump has played the force majeure card as a defence to a demand for payment from Deutche Bank Trust Company Americas for a $40 M portion of a $640 M financing for the Trump International Hotel & Tower in Chicago. The $40 M portion, which was personally guaranteed by Mr. Trump, came due in November, 2008. Mr. Trump raised the force majeure argument in court proceedings filed that month (Trump, Donald J. et al v. Deutsche Bank Trust et al, New York Supreme Court, Queens, 026841/2008).
The parties are currently in negotiations. North American developers and lenders are probably unlikely to receive the benefit of a Court-authored characterization of Mr. Trump’s views, but observers are watching carefully nonetheless.
Is Mr. Trump on to something? Is the current worldwide financial crisis a case of legal force majeure, allowing parties to be excused from their commercial contracts? Could force majeure become a form of business strategy?
There are subtle differences across jurisdictions between the concepts variously known as "force majeure", "Act of God" or "Vis major". Many jurisdictions equate the concept to natural disasters, as distinct from any human intervention. Other jurisdictions refer more generally to forces beyond the control of the parties. Quebec, in particular, translates force majeure as "superior force".
The case-law produced through the years by the courts generally revolves around the interpretation of the particular wording of a force majeure contractual clause, in order to determine whether a party may be excused, even if temporarily, from delivering on a contractual obligation. Apparently, Mr. Trump’s loan agreement may have had some distinctive force majeure wording, allowing for non payment even in the case of circumstances simply "not within the reasonable control of the borrower".
Generally, the concept of "force majeure" is made up of four elements:
- it is external, in that it is not caused by one or the other of the parties;
- it is unforeseeable;
- it is irresistible; and
- it results in an absolute impossibility for a party to perform its legal obligation.
The first three elements of force majeure are self explanatory. These three elements may in fact even apply to the current economic crisis. As Mr. Trump himself cites: "Would you consider the biggest depression we have had in this country since 1929 to be such an event? I would. A depression is not within the control of the borrower."
The fourth element of force majeure – absolute impossibility – is the tricky part. It is this notion of "absolute impossibility" that makes force majeure distinct from the whole realm of insolvency law and its specific rules. Implicit in the concept of force majeure is that a party has the means to respect its contractual obligations; it just physically can’t do it. Whether it is the hurricane that wipes out a whole production facility or the lengthy strike which blocks the ability of a party to take on input supplies, force majeure means that a commercial party "just can’t deliver", for love or money.
It is at this level that Mr. Trump would seem to be unlikely to succeed before the courts in his force majeure argument. Provided that some other assets are available to him in one form or another, money presumably may be found to repay the outstanding loan. Notwithstanding the extreme difficulty in refinancing due to the current credit crunch, there is no "absolute impossibility" for Mr. Trump to repay the loan.
However, consider the following scenario in a different commercial relationship.
You are the manager of one product line among many offered by a multinational. Due to either high input costs or low purchase prices for your product, your margins are thin. However, high volumes have always allowed you to squeak by.
The economic slowdown has reduced your sales volumes by a substantial amount and you now find yourself in a low margin, low volume business. Your superiors have ordered you to find a solution to your broken business model or else your product (and presumably your employment) will be discontinued.
From the particular perspective of your product, is this not a case of force majeure? You approach your commercial partners, who have locked in either long term volume purchases or long term supply commitments at (for you, if not for them) unattractive pricing. You tell your suppliers or purchasers that, for reasons outside of your control, which reasons were unforeseeable and are irresistible, you cannot, for love or money, continue to purchase their supply or deliver your product at previously agreed prices.
Your company has the means to deliver, but unless your partners change their pricing, there is an absolute impossibility for you to continue production.
The response from your commercial partners will obviously depend on the competitive landscape: where your product fits into the overall cost structure of your customers’ end product, the percentage of your suppliers’ overall revenues that you represent, and the ready availability in each case of substitutes.
Some of your commercial partners may accept your proposed pricing change and some may refuse. Some may sue to enforce your contract before the courts, challenging whether you are in fact (and in law) in a situation of force majeure. Some may choose to allege that you are "abusing your dominant position" under competition laws. Much will depend, as always, on the health and duration of the commercial relationship and of the personal relationships that underlie it.
Regardless of whether Mr. Trump succeeds in retaining control over the Trump International Hotel and Tower in Chicago, he may nonetheless have made yet another mark on the North American business landscape. The parties may or may not ultimately take the chance of letting the courts in the case break new ground in the world of commercial contract certainty. However, thanks to Mr. Trump, a new vocabulary may be just about to creep into the business strategy lexicon of North American suppliers and purchasers: "economic downturn force majeure".