When unforeseen circumstances make it difficult or impossible for a business to fulfil its obligations under a contract, is there any way to avoid liability? We take a look at the two possible options, force majeure and frustration.

With the widespread disruption caused by the pandemic, many businesses have found that, through no fault of their own, they are not able to carry out contracts as anticipated. In some circumstances, it may be possible to terminate or suspend a contract by relying on a force majeure provision or by claiming that a contract has been frustrated.

Force majeure

A force majeure clause in a contract specifies certain events which, if they make the contract impossible, inadvisable, illegal or impractical to carry out, can allow one of the parties to end or suspend the contract.

Examples include energy blackouts, strikes, emergency legislation, earthquakes, riots, pandemics or explosions.

In English law, force majeure will not be implied into a contract, it must be expressly stated. Because of the potentially harsh implications of terminating a contract, the courts interpret force majeure clauses strictly.

What a force majeure clause will include

The clause will specify what will be considered a force majeure event. It may refer to an epidemic or pandemic or the wording may be more general. If a non-exhaustive list is used, with the words ‘all other causes beyond the control of the party’ or similar, then the court may find that the ‘other causes’ must be similar to those set out in the list.

Wider wording, such as ‘all other clauses whatsoever’ or ‘exceptional circumstances’ opens the clause up and could potentially include breaches caused by the pandemic.

The force majeure clause could also be indirectly triggered by the failure of supply chains or by government restrictions that prevent a contract from being fulfilled.

When will the courts uphold a force majeure clause?

The force majeure event must be the only reason for non-performance and must have prevented, delayed or hindered the contract from being fulfilled.

Some contracts may contain the wording ‘but for’ or ‘results from’, meaning that it must be shown that the contract would have been carried out but for the force majeure event.

The defaulting party must take all reasonable steps to avoid the force majeure event and, where this is not possible, must mitigate losses, considering the interests of all parties. Failing to do this could result in the court not allowing reliance on a force majeure clause. In Channel Island Ferries Ltd v Sealink UK Ltd [1988] 1 Lloyd’s Rep 323, the defaulting party had not made vessels available as agreed in the contract. The court did not allow force majeure, finding that there should have been attempts to secure alternative ships.

It is essential to comply with any notice or other requirements in the contract, otherwise, it may not be possible to rely on a force majeure clause.

Proving a force majeure event

Evidence will need to be provided demonstrating why and how the contract could not be performed. By way of example, in the case of the Covid-19 outbreak, the required documents will include emergency government press releases stating what could no longer be done, restriction notices, travel bans, information issued by local authorities, National Health Service restrictions, closure orders and quarantine orders. Emergency legislation should also be cited where applicable.

If an event merely makes a contract more expensive to fulfil, the court will not find this to be a force majeure event. In Thames Valley Power Ltd v Total Gas & Power Ltd [2006] 1 Lloyd’s Rep 441 the court found that although supplying gas in accordance with the pricing mechanism in a contract was no longer economically viable, the contract could not be terminated for force majeure. If circumstances are simply ‘economically more burdensome’ this is not enough to invoke a force majeure clause.

Frustration

If a contract does not refer to a force majeure event or the event in question is not covered, then it may be possible to claim that a contract has been frustrated. Frustration is a common law principle and does not need to be specifically referenced within a contract.

If it can be shown that a contract has been frustrated, then it can be discharged, ending all liabilities.

Proving frustration

It will need to be demonstrated that the contract is physically or commercially impossible to fulfil or that performance of the contract was radically different from what was intended when the contract was entered into.

The court will need to see evidence that the sole commercial purpose of the contract has been frustrated.

In Herne Bay Steam Boat v Hutton [103] 2 KB 683, a steamship was hired for the day so that passengers could watch a naval review. The review did not take place, but the contract for the hiring of the steamship was not frustrated. The court found that the sole commercial purpose had not been defeated.

More recently in Canary Wharf (BP4) T1 Limited v European Medicines Agency [2019] EWHC 335 (Ch), premises were leased in London to give the EMA a base in the EU. The EMA claimed that Brexit had frustrated the contract. The court found it had not. Providing an EU base had not been a mutually contemplated purpose as the lease permitted the EMA to assign or sublet the property.

In summary

Care should be taken in asserting either force majeure or frustration of contract. If this cannot be proved to the satisfaction of the court, there is a risk that the party bringing the claim could themselves be in breach of the contract if they have failed to fulfil their own obligations.

Contact us

At RSW Law, we can discuss any commercial contract issues with you and explain your options. We can also draft robust contracts which protect your organisation’s interests as far as possible.

Our advice is intended to be practical and focussed on our clients’ business objectives and success. Our lawyers work in many areas, including financial services, retail, leisure, property and professional services.

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