Getting out of your contracts: Force majeure & frustration

These are clauses which are contained within contracts which the parties have already agreed to. These clauses alter parties’ obligations and or liabilities under a contact when a supervening event or circumstances beyond the parties control occurs and prevents one or all of them from fulfilling their obligations under the contract.

Depending on their drafting, such clauses may have a variety of consequences, including: excusing the affected party from performing the contract in whole or in part; excusing that party from delay in performance, entitling them to suspend or claim an extension of time for performance; or giving that party a right to terminate.

Common examples of force majeure clauses often include specific events such as war, terrorism, earthquakes, hurricanes, acts of government, plagues or epidemics. Where the term epidemic, or pandemic, has been used, that will clearly cover Covid-19.

To see whether these clauses apply, we have to look at the specific wording of the clauses that were entered into, to see whether an event as defined in them has been triggered. There is some thought amongst practitioners that if such clauses rely on an act of government to occur then the question in the current climate is whether the recommendations that are currently in place by the government would amount to such a trigger.

Ultimately, each case will depend upon the particular wording of the force majeure clause. A COVID-19 example might be for force majeure to be disallowed if a regime is introduced permitting businesses to operate where employees have been tested, but the employer elects not to have its employees tested. Another example is in the case of a JCT contract, force majeure is a Relevant Event which entitles a contractor to an extension of time on its obligations and there is also built in termination provisions which could apply.

In the absence of a force majeure clause or if this does not cover a COVID-19 event, the doctrine of frustration could be helpful to some cases.

A frustrated contract is a contract that, after it has been entered into, and without fault of either party, is incapable of being performed due to an unforeseen event(s), resulting in the obligations under the contract being radically different from those contemplated by the parties to the contract.

The legal consequence of a contract which is found to have been frustrated is that the contract is automatically terminated at the point of frustration. Once a contract is frustrated; this only deals with future obligations on the parties and does not made the contract null and void.

The test to determine whether a contract has been frustrated is defined in Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 which states that:

“…frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. … It was not this that I promised to do.” (Lord Radcliffe)

This means that frustration arises because of the effect of the supervening event on performance of the contract, or on the reason for bargaining for that performance in the first place. Central to the test for whether frustration can help you is reference to “radically different”. This is means that the doctrine of frustration is not lightly enacted.

In the current difficulties that we are experiencing with COVID-19, frustration could potentially assist parties where they are unable to perform the contract. We would still need to consider the type of contract, what obligations the parties had under the contract, whether goods or service are being supplied or assets purchased or sold, and how the current pandemic is interfering with the obligations on the parties under the agreement.

Frustration is not a get out of jail free card and is often difficult to prove. Proving hardship is not enough. As detailed in Lord Radcliffe’s comments, the test is whether the contract has become radically different from anything contemplated by the parties at the time it was made. Therefore in order to utilise frustration usually performance in accordance with the contract has become commercially impossible.

The first thing is for businesses to consider whether they are able to perform their contractual obligations. If performance is unlikely to take place, then it is important that the contracts are reviewed so that you understand what your rights and obligations are. Once this information has been obtained businesses can establish how best to deal with each scenario, including whether a force majeure clause or frustration of the contract could apply.

Many business are however working together when it comes to contracts and the performance of these rather than opting straight for the legal route. Where they is a risk of delay or risk of non-performance as a result of COVID-19 parties must know their position under the contract before assessing their next step.

If you are having problems relating to performance of a contract or you are unsure of your obligations within the contract and want to be clear on these, speak to our solicitors on 02380 226891 for advice or alternatively contact us through our on-line chat on our website.