Force Majeure & Frustration
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The weather is getting better, the lockdown is almost fully lifted and the vaccine programme is being rolled out fantastically well. You would be forgiven to think that we will soon be rid of the pandemic which has plagued us for so long and that all will be back to normal.
The question that arises, however, in the minds of many businesses is what will normal actually look like to them. As we enter into a new era of post COVID we need to realise that the world is very different to what it was like pre COVID. Not only do businesses need to deal with the longer term effects of COVID but in the UK we also need to take measures to comply with the new rules and regulations brought about by BREXIT.
In this short blog I intend to deal with the most likely affect COVID will have on commercial contracts and the steps a business may wish to take to protect its interests. Whilst you cannot know or dictate what a third party will do you can go some way to protect your business by covering certain events which may or may not occur.
It is vital, if not already done so, to review your standard contract and carry out a full risk assessment. The essence here is protecting the business and hence, a full consideration of the terms and how these may be affected following on from the pandemic. As suggested this may not be as a result of your doings but may be due to a shortfall in supply or other form of disruption in the supply chain. This will clearly have an impact on whether your business can comply with its obligations under the contract. You will need to consider the effect this will have on the contract (delay, total failure, cost and potential insolvency) and how you may wish to mitigate this.
There are, of course, various matters which need to be considered such as employees possibly requesting flexible working hours (these requests need to be taken seriously), insolvency provisions, redundancies and sourcing but to name a few. All of these warrant a full discussion of their own and, as such, will not be dealt with by me here.
I would like to, instead, concentrate on Force Majeure and Frustration. Both these concepts have been with us for many many years but have never been fully negotiated between contracting parties who merely use boilerplate clauses to cover the eventuality of supervening events with the use of Force Majeure.
The first thing to understand when reviewing Force Majeure and Frustration is the nature of the same. Contrary to common belief Force Majeure is not a recognised legal concept in English law but rather a contractual concept which derives its applicability from the contract itself. There is no legal definition in English law but it usually covers matters which are the contemplation of the parties and outside of their parties control which will render the performance of the contract impossible or substantially different to that contemplated.
As mentioned above little time and effort was spent in negotiating Force Majeure clauses. These were usually inserted as box standard with little thought of the consequences. It is, my belief, that this will need to change as it will become for the most part the only way to protect the business interest from adverse supervening events. As it is not a legal concept it is essential that it is fully defined and the effect of the consequences covered.
As the clause cannot be implied into the contract the parties should consider the following when drafting the contract:
- The definition of what will amount to a Force Majeure event. The clearer the definition in the contract the less manoeuvre to litigate over the meaning of the same;
- Consider the effect of the Force Majeure on the parties’ obligations under the contract. This will require consideration such as cost, delay in performance or supply and complete failure in the ability to comply with obligations under the contract;
- Should a supervening event occur what do you wish to happen. It is usually only viewed as a last resort to treat the contract as at an end. The parties will usually prefer to be given an extension of time to comply or have a limited liability clause inserted or vary the contract in some other way;
- Notification provision. This will normally be in writing from the party who has been effected by the Force Majeure. It would normally require to be served as soon as reasonably possible following the Force Majeure event and set out the event together with the likely length of time this will continue for.
Should there be no provision for Force Majeure within the contract the parties to the contract may only rely on the common law doctrine of frustration. Whilst this need not be written into or form part of the contract (as it will be implied) it has an extremely high burden of proof for the party relying on it to establish.
For frustration to be evoked there must be a supervening event which occurs (and no provision within the contract) which is unforeseen by either of the parties at the time of entering the contract and neither party are at fault/blame which results in such radically different obligations to make it unjust to hold the parties to the contract (this does not include merely increased costs or difficulty in performance). In most cases the Court would look at the event as having made the performance of the contract impossible.
The doctrine is limited in its applicability and will not apply in circumstances where there have been provisions made in the contract which deal with the event where the parties, at the time of the contract, foresaw that such an event could occur but decided not to deal with the consequences or at the time of the contract the parties ought to have foreseen such an event. Perhaps the most drastic limitation is that if frustrating event is established the sole remedy is to automatically bring the contract to an end. Law Reform (Frustrated Contracts) Act 1943
The Courts have already shown their reluctance in finding an event to actually give rise to frustration: Canary Wharf Management Limited –v- European Medicines Agency (2019).
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