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Force Majeure And Frustration In Contracts Affected By COVID-19

Force Majeure And Frustration In Contracts Affected By COVID-19

Expert view

The pandemic and resulting government and business response has caused disruption to a lot of contracts. Parties are now scrutinising their contracts in detail to see what options they have to extricate themselves without incurring liability.

Two of the major areas being looked at are force majeure and frustration.

Force majeure

Force majeure is a generic term in contracts for events completely beyond the control of the parties which make the contract impossible to perform. Traditionally, they will include events like government intervention or “acts of God” such as floods or earthquakes. When one of these clauses applies the parties can usually terminate the contract without penalty.

Although clauses of this type are common, “force majeure” actually has no specific legal definition in England. It is not a legal principle as such, just a term used for a type of clause. This means that if the contract is taken to court, the judge will look at the precise wording of the contract to determine what is and is not included. A clause that only says something like “the usual force majeure provisions apply” will have no effect.

It is therefore important that a force majeure clause be as specific as possible. Where there is any doubt, the court will usually interpret the clause against the party trying to rely on it. This means that they should include everything you can envisage possibly interrupting the contract. This is of course, difficult, because the events are by their nature unforeseeable.

The COVID-19 pandemic will have caught a lot of contracting parties by surprise. Although there is no “standard” force majeure clause, there are common precedents available. These tend to include acts of government, but not disease or pandemic.

What this means in practical purposes is that you may not be able to get out of a contract just because of the pandemic itself, even if it is obvious that the effect will be disastrous for you. If all your customers disappear because they are afraid of the disease you may still have to honour the contract. But if the government has issued regulations which make it impossible for you to perform the contract, that may be a different story.

You also need to check what the clause allows you to do in a force majeure event. It may cancel the contract automatically, or only part of it. You might be obliged to give notice that an event has occurred, and only be excused from obligations that arise after the notice has been given.

In all cases, it will depend on the precise wording of the contract.

In the wake of the pandemic a lot of businesses are looking at force majeure clauses, both with regard to existing contracts, and new contracts they want to agree. If agreeing a new contract it is of course possible to include the pandemic specifically – but parties should be careful that the clause actually works in their favour.

One important feature of force majeure clauses is that both parties can rely on them. They also tend to be interpreted narrowly, so that if there is any question about validity, the party not trying to get out of the contract will probably get the benefit of the doubt.

It is therefore critical when drawing up a force majeure clause that you are not giving the other party the option to withdraw from the contract while leaving you exposed. For instance, in a situation where you are obliged to pay for services, and the pandemic means that you can't afford to do so, that doesn't release you from your obligation to pay. It might, however, make it impossible for the other party to perform the services, and you could be left having to pay for services you cannot afford and which were never provided.

Unlike force majeure, frustration is a legal principle in English common law. This means it is something which the Court may take into account when interpreting a claim for breach of contract, even though it is not specifically referenced in the contract itself.

The essence of frustration is that the contract becomes impossible for you to perform, or the nature of the contract has changed so much that what you are now expected to do is not the same thing that you originally agreed to do. If so, the contract may be held to be frustrated, and the relevant parts of it will be cancelled.

It is important to note that it is the nature of the work under the contract that must have changed. If all it will do is make it more expensive for you to perform, this is probably not enough to treat a contract as frustrated.
One of the obvious reasons a contract might have become difficult or impossible to perform under the present circumstances is what we call “supervening illegality”: that since the contract was formed the law has changed so that it is no longer legal to do the work required. This will apply to a lot of businesses affected by the lockdown measures under the Health Protection Regulations.

Frustration has been somewhat unfashionable for some time as a line of argument but is now receiving a lot of attention from contracting parties, so a lot of the case law on the subject is quite dated. In general, courts do not like interfering in contracts and tend to see their job as interpreting the terms, rather than amending or annulling them. They therefore set a high bar for what counts as frustration.

As a result, and while it may be attractive to cite frustration when attempting to get out of a contract, it is something to be invoked with caution. Really, it should be used as a last resort, where there is nothing else in the contract which would apply to the situation. The written contract terms, including any force majeure clause, will be the first things a court looks at and if they make allowance for the situation in question then frustration will probably not apply.

If you are going to claim illegality as the basis for frustration, you should also check that the work being talked about is actually prevented by the law. There is a lot of confusion and misinformation about what the law says, and people are often under the impression that the regulations are more restrictive than in fact they are. A lot of businesses are specifically exempted from all or part of the restrictions.

If you wrongly claim that a contract is frustrated and withdraw from it, that will put you in breach of the contract and you will be liable for damages to the other party. It is therefore essential that you make sure firstly that you have no other options, and secondly that the contract is genuinely frustrated, before you terminate the contract.

For the same reason, if the other party to a contract withdraws and claims frustration, don’t just take their word for it. They may have misunderstood how it works, or simply be using it as an excuse to get out of a contract obligation they no longer find attractive. If they try to terminate a contract for frustration when they’re not entitled to, you may well have a claim for breach.

If you find yourself in difficulty with performing a contract due to the effects of COVID-19, you may have an escape route, but you can’t take that for granted. What is the best way to deal with it will depend on the type of contract and the terms you have agreed with the other contracting parties. Trying to terminate in the wrong way, or without proper basis, will only make matters worse.

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