Businesses and individuals performing contracts in difficult times — force majeure and frustration
What happens when the circumstances in which a contract has been created fundamentally change?
Whether it’s because of the pandemic or Brexit, one thing has become clear — circumstances occur which result in it becoming impossible for contracts to be performed. And, as everyone knows, breaching your contract can mean that you are liable to a claim in damages or, conversely, (if you are the innocent party who has been subjected to a breach) may mean that you are in a position to make a claim for your losses.
So what is the position under English law when a party finds that it has become impossible or commercially unviable to perform its contract? This is the province of what is known as “force majeure” clauses in contracts and, where there is no such clause in a contract, the doctrine of “frustration”.
Force majeure v frustration
What happens, then, when the heart of the agreement between the parties ceases to beat because it’s just no longer capable of being performed? Well, generally there are two roads that lead away from this scenario:
- The first of these is where the parties have agreed on what will happen if something unforeseen occurs which renders the contract unperformable by one or both of them — in other words, where they have a “force majeure” clause in their contract; or
- In the absence of such a clause — where there is no force majeure clause — the contractual doctrine of “frustration” comes into play.
Force majeure clauses are contractual “escape hatches” that permit a party to avoid liability for failing to fulfil its obligations under a contract. Typically, they act to suspend the obligations of those who find that they are no longer able to do the very thing that they have contractually promised to do. They may also provide for the contract to be brought to an end if it becomes commercially unviable. If your contractual plans have been unseated by COVID-19 (and more on this below) you may well find yourself looking to see whether any contacts which you have entered into contain force majeure clauses. If so you (or the other party) may find yourself greatly relieved to be let off the hook — or you may be unhappy to discover that your counterpart is! Bear in mind:
- The term “force majeure” is one that is derived from French law and which doesn’t, strictly, have any recognised meaning in English common law. Its meaning, therefore, needs to be properly defined in any contract to avoid unwanted ambiguity — in other words, it’s down to the parties to make it clear what they mean by force majeure in any given context and to define this properly in their contract so that it doesn’t give rise to uncertainty. But, in its broadest sense, force majeure events are generally considered to be acts, events or circumstances beyond the reasonable control of the parties concerned and force majeure clauses are there to relieve the parties of the consequences of such.
- Many force majeure clauses provide that the benefit they confer should only be available where the affected party has taken all steps possible to avoid the event or the impact of its consequences. So a force majeure clause doesn’t always act as a “get out of jail” card.
- There are statutory limitations on the effectiveness of force majeure clauses which may impose a test of “reasonableness” on any given clause — so there may be protection available to a party who would otherwise find themselves placed in an unfair position, without legal recourse, because of a strategically inserted force majeure clause.
A contract can be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract or transforms the obligation to perform into one which is radically different from that undertaken at the moment of entry into the contract.
Examples of frustrating events include destruction by fire of the subject matter (i.e. a venue which was hired for a concert being accidentally burnt to the ground) or a contract’s supervening illegality where subsequent changes to the law rendered performance illegal. An example of the latter would be where war breaks out and an export contract would be discharged by “frustration” because it would be unlawful to supply material to an enemy.
The ability of a party to recover money paid under a contract before the occurrence of a frustrating event is typically governed by the Law Reform (Frustrated Contracts) Act 1943. Generally speaking, the statute applies to any commercial contracts and provides that:
- Money paid before a frustrating event can be recovered and the money due before the frustrating event but not in fact paid ceases to be payable.
- A party that has incurred expenses is permitted, if the court thinks fit, to retain the amount up to the value of expenses out of any money they have been paid by the other party before frustration or, where money was due and paid at the time of frustration, to recover a sum not exceeding the amount for expenses.
- The court may require a party who has gained a valuable benefit under contract before the frustrating event to pay a “just” sum for it.
Please note that there are many additional sources of law (Acts and decided cases beyond the scope of this article) which can impact the position — consumers, in particular, enjoy many additional protections so it’s always important to check the specifics of any particular case.
Common problems during the pandemic
The COVID-19 pandemic has shattered the contractual plans of a huge number of individuals and businesses. This includes:
- Cancelled holiday accommodations and other bookings prevented by local and national lockdowns. In situations such as this, frustration is likely to come into play, if there is no force majeure clause in the relevant contract.
- Cancelled travel arrangements including, in particular, international travel and flying. In most cases, the relevant contractual, statutory and regulatory frameworks entitle a passenger to a refund or credit in circumstances where they are unable to travel (but not, necessarily where they choose not to travel).
- Parents whose children in private education have been compelled to study from home but who have been concerned that there is no legal relief from their obligation to pay school fees in full. Here the position set out in the contract between the parties is likely to be the determining factor in determining the legal outcome.
In all of these scenarios, force majeure clauses or the doctrine of frustration have come into play. In some of these scenarios, there are, additionally, statutory or regulatory rules which affect the situation and provide consumers with additional protections — but it’s almost always worth considering the scope of force majeure and frustration when the factual matrix within which your contract is set has radically changed.
- If you are party to a contract that has become impossible to perform — or where someone else tells you that is the case — check your contract for a force majeure clause and see how that affects the position.
- If there is no such clause, consider if the doctrine of frustration applies and how this may affect the parties’ respective positions.
- Most importantly, make sure that, wherever you can, your future contracts do contain a force majeure clause and that this is properly drafted to offer you the maximum protection in the event that life throws the unexpected at you or your business.
For guidance on your contractual obligations, contact our commercial contract lawyers.