Five things to know about force majeure and contract frustration
As a result of the coronavirus pandemic we have seen a sharp increase in commercial contract cases involving issues around force majeure and frustration, in English law.
Whether you're in the retail sector or the food and drink sector, there are five initial questions that every supplier and purchaser can ask themselves to see if their contract has been frustrated or is subject to a force majeure clause (“FM Clause”).
1. Force Majeure Clause – is there one?
Firstly check the contract for a Force Majeure Clause. Such a clause may not be labelled an FM Clause, so look at the substance of what is said in the contract, not just the form.
Force Majeure is French for “superior force”. It will be a clause that relieves contracting parties from performing their obligations where a supervening event beyond their control arises, making performance inadvisable, commercially impracticable, illegal or impossible.
Generally you can rely on a force majeure event where it prevents or delays the ability of a party to perform its contractual obligations. The events listed in the clause may be specific or general and may be factual (the pandemic) or legal (statutory restrictions imposed in light of the pandemic).
If a contract is completely silent on force majeure, English law will not imply it into the contract – in which case you may want to move on to consider the law on frustration (see points four and five below).
2. Can I invoke the Force Majeure Clause?
If you want to rely on the FM Clause, you will bear the burden of proving the scope of the clause and that the facts in your case fall within it.
Courts tend to interpret FM Clauses narrowly and within the confines of the events listed. You must be prepared to show that the non-performance was beyond your control, that you did not assume responsibility in relation to it and there was nothing that you could have done to avoid or mitigate the event.
If you want to argue the FM Clause is inapplicable, you should consider whether the any or all of above elements may be challenged.
3. Are the consequences of the Force Majeure Clause helpful to me?
Ultimately, you must ask yourself what the consequences are if an FM Clause operates.
Will it achieve the outcome that you desire? Does it matter to you/affect you? This will all depend on the express terms of the clause, so read them with care and see if they help or hinder you.
Common consequences are that parties agree to suspend performance or excuse liability for non-performance. Sometimes though they may simply require the parties to find alternative arrangements as may be fair, reasonable and practicable.
4. Has the contract been frustrated?
If there is no FM Clause or if the circumstances that you have encountered do not fall within the parameters of the FM Clause the next question is if the contract is frustrated.
A frustrated contract is one that, after it is formed and without fault of either party, is incapable of being performed due to an unforeseen event resulting in the obligations under the contract being radically different from those contemplated by the parties.
In arguing that a contract has been or is not frustrated, you should ask yourself was the event foreseen? If so, it is likely the contract cannot be frustrated. If it was not, you should ask whether the agreed performance is now impossible, the agreed contractual purpose is now impossible and/or there has been a significant change to a mutually agreed state of affairs.
If the answer is yes to any of these questions, the contract may very well have been frustrated. You will need to go on to consider though if the event is so fundamental that it is regarded as striking at the root of the contract.
5. What are the consequences of frustration?
While the effects of an FM Clause are tailored, the effect of frustration is to discharge the contract. The contract is automatically discharged and brought to an end forthwith. The parties are excused from their present and future obligations.
Also, if the Law Reform (Frustrated Contracts) Act 1943 applies, money paid before the frustrating event can be recovered and money due before the frustrating event, but not paid, ceases to be payable.
Please note that this article is meant as general guidance and is for information only. Each case depends on its own specific facts and this blog should not be relied upon or used in place of obtaining appropriate legal advice.
If you require support in relation to any commercial contract issues involving either force majeure or frustration please get in touch via the contact details below.
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