A contract is made to honour specific agreements between parties. However, when the previously agreed terms, for an unexpected reason (such as the Coronavirus / Covid-19 pandemic), can no longer be carried out, the contract becomes different to what it was when the agreement was first made.
Under contract law, force majeure may be invoked if a force majeure clause has been included as part of the contract. In the absence of such contractual provision, the party will have to rely on the common law doctrine of frustration to void the contract.
The invoking of force majeure clause and frustration of contract under common law (also known as “frustration of purpose” in the U.S.) would now, more than ever be prevalent in all industries with the unprecedented arrival of Covid-19.
Due to lockdowns, social distancing restrictions and shut down of businesses, what was once an easy contractual transaction becomes a challenge. Hence, parties of a contract that is no longer able to be performed because of an unexpected event.
In this article, you will be able to understand the basic concept of force majeure and frustration of contract, the relevance it has on agreements due to the coronavirus crisis and the effect of applying frustration.
Most importantly, this article will discuss the success rate of applying these concepts in contract law and whether the pandemic is a good enough reason to invoke the force majeure clause or the common law of frustration.
The term force majeure is taken from French meaning “superior force”. It is a common clause in a commercial contract to stipulate the consequences of an extraordinary or unforeseen event beyond the control of the parties, such as the event described as “Acts of God”.
The clause is intended to suspend the performance of the contract during the force majeure period, and in case of an extended force majeure event, free the responsibilities of the parties from their contractual obligations.
The force majeure clause helps allocate risks when unforeseen events adversely affect the ability of one or both parties to perform their contractual obligations on time or in full.
A Force majeure clause typically has the following characteristics:
For examples of force majeure clauses, please refer to:
General Boilerplate Clause / Term Force Majeure
There is no general concept of force majeure in English law. Therefore, any claim for force majeure must be based on the terms of the contract. Whether coronavirus constitutes force majeure depends on the wording of the clause itself and the interpretation of the terms by the court.
Generally, the affected party citing this clause generally must show:
General force majeure clauses should stipulate the specific effect of force majeure, that is, the right to (i) postpone / suspend the performance of, (ii) claim an extension of time for performance of; or (iii) revoke / terminate the contract caused by force majeure.
There is a subtle but important difference between revocation and termination. To revoke a contract means to cancel the contract and bring the parties back to the beginning as if the contract was never entered into. To terminate means bringing a contract to the end, and certain compensation might need to be paid for the early termination.
If this clause does not provide for the right of revocation, even if effective force majeure occurs, the right of termination stipulated in this clause will not arise. The party seeking to get out of the contract will have to resort to the principle of frustration to avoid compensation for breach of contract.
If there is no force majeure clause in the contract, the common law principle of frustration should be considered. The frustration of purpose of a contract refers to where after an agreement had been made, an event or situation occurs that the parties did not anticipate and beyond their control, leading to the performance of the contract becoming practically or legally impossible.
Most importantly, there must be no fault of any party when this frustrating situation arises for the contract to be successfully frustrated. Frustration tends to be narrower in scope than contractual force majeure.
Essentially, this refers to when a contract becomes void. When a contract becomes void, the agreement is no longer legally binding and is no longer valid.
This becomes a consequence because one party, as a result of the unexpected event, cannot carry out their obligated duties anymore, or the contract becomes entirely different from that which the parties intended to be.
If this is the case, the agreement becomes void. However, common law makes it clear that frustration cannot be used only to avoid a bad business transaction, or that the parties have foreseen relevant events.
For a Notice of Frustration of Contract to cancel / voiding of contract, please refer to:
The test of frustration requires the occurrence of significant changes to contract rights/ obligations, rather than the situation that the parties reasonably envisaged when entering into the contract. Therefore, it is unfair to require both parties to perform their original contractual obligations under the new change of circumstances.
There are three main elements that must be fulfilled in order for the contract to end and for the parties to be excused of all further performance.
Generally, if after the contract is made, an unforeseen event occurs that was beyond the control of either party, like the coronavirus, which makes the further performance of the contract;
then a party could invoke the frustration of contract.
One requirement of frustration would be if it becomes illegal to carry out the activities previously legal from the agreement.
Example: If manufacturer A and distributor B entered into a trading contract to distribute certain products, and then a trade sanction is imposed by B’s country on goods imported from A’s country. The trading contract thus becomes illegal under the laws of B’s country and hence would be frustrated accordingly.
If it becomes impossible to carry out the agreement, frustration occurs. This means if the point of the contract is no longer able to be performed, it becomes an impossibility.
For example, there was a famous English case (Taylor v Caldwell) where there was a contract to hire a theatre for a musical. However, before the musical could take place, a fire broke out and destroyed the theatre. Thus, it becomes impossible to continue to perform under the agreement. The contract is thereby frustrated accordingly due to the destruction of the subject matter.
This requirement to be fulfilled under the original contract agreed by both parties is now fundamentally different due to the unforeseen event.
On the grounds of fairness, the contract would be set aside (void) because the contract has become completely different from the original intended purpose.
Another famous English case (Krell v Henry) involves a contract to rent a room that overlooked a coronation for the purpose of viewing the coronation. However, the coronation was cancelled. Thus the rental agreement is frustrated because the underlying condition that was essential to the performance of the contract, i.e. to view the coronation, ceases to exist.
Other examples of frustration events include delay rendering the performance of the contract impossible; and the death or incapacity of the parties.
However, courts are slow to find frustration outside of illegality and impossibility because the contract would need to be radically different. This makes it difficult to prove the frustration of a contract due to it being fundamentally different.
As such, the scope of application of this principle is very limited:
In the absence of a force majeure clause, frustration should apply to many contracts made prior to the coronavirus pandemic. Looking at the 3 elements:
For example, with coronavirus leading to multiple shutdowns of cities and businesses as ordered by the government, then most business activity would then be shut down as well.
Take manufacturing, for instance, where party X had a contract with party Y to manufacture goods in party Y’s city. However, if there was a major outbreak in party Y’s city that lead to a complete shutdown of the city by Y’s government, this would mean factories would need to close down as well.
In this example, there may be two grounds to call for the frustration of the manufacturing contract:
Therefore, if the main point of the contract was for party Y to manufacture and supply goods from their city for party X, then the contract would be frustrated.
However, although the coronavirus pandemic would’ve brought contract stress to either performing parties, frustration does not always apply in certain situations where there is no fundamental change to the performance of the contract.
Using our previous example where party X had a contract with party Y to manufacture goods in party Y’s city, except in this case, there was a minor outbreak in party Y’s city, and the government did not impose a shutdown of businesses/factories.
If due to the abundance of caution, Party Y shuts down the factory anyway, it would unlikely to constitute frustration, since it is a self-induced shutdown. The frustration of contract only occurs when an event happens outside the control of the parties.
Party Y had the capability to perform the contract, but instead, decided to shut down the factory without being legally required to do so.
Although, if two parties were to make an agreement whilst the pandemic was brought to light, and still did not include anything in their contract that protects themselves from an instance where coronavirus hinders the possibility of not being able to perform the contract, the parties will bear the risks themselves.
If the contract is negotiated and concluded during the coronavirus pandemic, then it cannot fall into the category of unforeseeable. Then, frustration wouldn’t be applicable in this situation if there was foreseeability of a frustrating event.
It would be helpful to specifically include or exclude coronavirus from the list of events in the force majeure clause to show the parties’ intention on whether it should be included as a force majeure event.
This makes it easier to deal with contract stress when unexpected events occur because the contract would’ve already covered the consequences.
For example: if it was very clearly stated in the force majeure clause that under a pandemic crisis, the contract would be void (ended), then that is exactly what would happen in light of the situation.
Courts are reluctant to read the wording of the clause to cover frustration unless the wording is sufficiently clear to cover a pandemic.
To avoid potential legal dispute, the first port of call is always to include a force majeure clause in a contract. The wording is crucial in determining whether or not the clause will take effect.
A well-drafted force majeure clause will clearly define the events covered under the clause and show the intention of the parties on whether events like Covid-19 will be covered.
Should there be no force majeure clause, it is possible to rely on the frustration of contract to invalidate contracts affected by the coronavirus pandemic due to impossibility or illegality. However, as discussed in this article, the scope under the common law of frustration is generally narrower than that of a force majeure clause.
The success of pleading frustration will be dependent on the individual circumstances of the parties involved. The court will take into consideration the restrictions involved and how long the parties will be affected by the coronavirus.
Please note that this is just a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may want to speak to your legal advisor.
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