World financial crisis as force majeure

Is the world financial crisis a “force majeure” that would allow Dow Chemical to walk away from a contract or require the extension of maturity of a construction loan guaranteed by Donald Trump?  BusinessWeek reports:

Is the economic crisis akin to an earthquake or an act of war? Under force majeure, a long-standing legal doctrine, companies can argue that natural disasters or other calamities should excuse them from living up to the terms of a deal. Now, a growing number are contending in lawsuits that the economic crisis should similarly let them off the hook.

In a Feb. 3 filing in Delaware Chancery Court, Dow Chemical (DOW) said “a cascading sequence of market failures of historic proportions” justifies its effort to walk away from a July 2008 agreement to acquire Rohm & Haas (ROH). Rohm sued the chemical giant in January to force the $15.4 billion deal to go through, and a trial is scheduled for Mar. 9. Dow Chemical, which lost Kuwaiti funding for the deal in December, says in a statement that “the economic reality of late December and early 2009 is far worse than in July 2008.” A Rohm spokesperson says her company firmly believes that “Dow has the means to finance the deal.”

By most accounts, Dow Chemical faces an uphill fight. Judges rejected nearly every effort to revise or rescind deals after the oil price shocks of the early 1970s and the Asian economic collapse in 1997. Robert E. Scott, an expert in business transactions at Columbia Law School, says courts tend to dismiss economic force majeure cases because they “don’t want to let parties get out of contracts too easily.” And Scott doesn’t think the current downturn will lead to different results.

Still, lawyers say they expect more businesses to cite the meltdown as an excuse to dodge obligations. Luc A. Despins, a bankruptcy attorney at Paul, Hastings, Janofsky & Walker in New York, says he already has seen several companies use that argument in negotiations with creditors.

Business contracts often contain force majeure clauses, which detail events that can allow a company to delay or cancel what it has agreed to do. Events such as fires, floods, riots, strikes, and terrorism are typically specified. A construction loan pact between Donald Trump and Deutsche Bank (DB) also includes the unusually broad phrase “any other event or circumstance not within the reasonable control” of the borrower. Trump is now arguing in a New York State court that the “calamitous economy” falls under that definition and should preclude Deutsche Bank from collecting $40 million on a loan that he personally guaranteed for a hotel and condominium tower in Chicago. “A lot of people are starting to say that we’re in a depression,” says Trump, “but it’s a lot better if you have the language in your contract.” Deutsche Bank declined to comment on the pending lawsuit.

In Megaworld Globus Asia, Inc. vs. Mila S. Tanseco, G.R. No. 181206, October 9, 2009, Megaworld failed to deliver a pre-sold condominium unit on the stipulated delivery date of the unit. In its Answer to the complaint filed by the buyer, Megaworld attributed the delay to the 1997 Asian financial crisis.

The Supreme Court rejected the defense and reiterated its previous rulings that the 1997 Asian financial crisis cannot be considered a “force majeure”:

Article 1174 of the Civil Code provides:

“Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable.”

The Court cannot generalize the 1997 Asian financial crisis to be unforeseeable and beyond the control of a business corporation. A real estate enterprise engaged in the pre-selling of condominium units is concededly a master in projections on commodities and currency movements, as well as business risks. The fluctuating movement of the Philippine peso in the foreign exchange market is an everyday occurrence, hence, not an instance of caso fortuito. Megaworld’s excuse for its delay does not thus lie.

The Supreme Court’s ruling is consistent with its previous rulings on the matter.  For instance, Fil-Estate made the same arugument in  Fil-Estate Properties Inc. vs. Sps. Gonzalo & Conzuelo Go., G.R. No. 165164,  August 17, 2007:

Petitioner, citing Article 1174 of the Civil Code, argues that the Asian financial crisis was a fortuitous event being unforeseen or inevitable. Petitioner likewise cites Servando v. Philippine Steam Navigation Co., to bolster its case. Petitioner explains that the extreme economic exigency and extraordinary currency fluctuations could not have been reasonably foreseen and were beyond the contemplation of both parties when they entered the contract. Petitioner further asserts that the resultant economic collapse of the real estate industry was unforeseen by the whole Asia and if it was indeed foreseeable, then all those engaged in the real estate business should have foreseen the impending fiasco. Petitioner adds that it had not committed any fraud; that it had all the required government permits; and that it had not abandoned the project but only suspended the work. It also admits its obligation to complete the project. It says that it had in fact asked the HLURB for extension to complete it.

The Supreme Court ruled:

Worthy of note, in a previous case, Asian Construction and Development Corporation v. Philippine Commercial International Bank, the Court had said that the 1997 financial crisis that ensued in Asia did not constitute a valid justification to renege on obligations. We emphatically stressed the same view in MondragonLeisure and Resorts Corporation v. Court of Appeals, that the Asian financial crisis in 1997 is not among the fortuitous events contemplated under Article 1174 of the Civil Code.

Also, we cannot generalize that the Asian financial crisis in 1997 was unforeseeable and beyond the control of a business corporation. It is unfortunate that petitioner apparently met with considerable difficulty e.g. increase cost of materials and labor, even before the scheduled commencement of its real estate project as early as 1995. However, a real estate enterprise engaged in the pre-selling of condominium units is concededly a master in projections on commodities and currency movements and business risks. The fluctuating movement of the Philippine peso in the foreign exchange market is an everyday occurrence, and fluctuations in currency exchange rates happen everyday, thus, not an instance of caso fortuito.

Based on the foregoing rulings of the Supreme Court, it is likely that the word financial crisis will not be considered force majeure under Article 1174 of the Civil Code.