The country and indeed most of the world, are locked down to help in the fight against Covid-19, as these unprecedented times have seen a suspension of our normal ways of life, business and trading.
As lawyers, we are being asked more and more: What is the legal position when your ability to perform a contract is disrupted by Coronavirus and the related civic restrictions?
You may have heard the following two terms referred to a lot recently, (1) ‘Force Majeure’; and (2) ‘Frustration’. This article provides an overview of these concepts, which will inevitably surface as the basis of many contractual disputes arising in the wake of this pandemic.
1. Force Majeure
Force Majeure (literally translated as ‘superior or major force’, and also sometimes figuratively translated as ‘Act of God’), is, in a legal sense, when a party or parties to a contract are excused or suspended from performing their contractual obligations, if an event occurs outside of their control and renders performance of the contract substantially different, if not impossible. The most common examples of force majeure events are war, riots, earthquakes, hurricanes, lightning, and acts of terrorism.
In England and Wales, force majeure is only available to be called upon when already expressed in a contract. There is no implied right to hold it out as an excuse for non-performance.
Further, the party seeking to rely on the force majeure clause must prove that the event falls within its definition as described in the contract. In this regard, the court will interpret the words against the relevant facts. In addition, the party seeking to rely on the force majeure clause will also need to demonstrate the following:
- The event was the sole purpose for not being able to perform the contract;
- Their inability to perform the contract is as a result of circumstances that were beyond the control of either party;
- The event was not anticipated at the time the parties entered into the contract; and
- The party has taken all reasonable steps to limit and/or avoid its consequences.
If a force majeure event is established, the parties should look to the contract to provide details on the parties’ rights and liabilities, and how to exercise the force majeure clause; whether this be a suspension or termination of the contract.
Where a contract does not have a force majeure clause, the parties can look to apply the doctrine of frustration.
Frustration also arises when a serious and unexpected event occurs, that is beyond the control of the parties that renders the contract impossible to perform, or which radically changes the obligation from what was envisaged at the outset. Unlike force majeure, frustration if established, will mean the contract is automatically terminated with neither party being liable for the breach. Also, unlike force majeure, frustration need not be expressed in the original contract, and in that sense, it is an implied right to be called on.
There is a high threshold for frustration to be established and the party seeking to rely on frustration will need to demonstrate that the frustrating event was not foreseen by either party to the contract, nor had the event occurred through fault of either party.
Circumstances that cause a party increased costs or hardship in performing the contract will not be enough to amount to a frustrating event.
It remains to be seen how the courts will treat such disputes and interpret the wording of force majeure clauses and frustration events in the wake of Covid-19.
If you require any advice or assistance please do not hesitate to contact our Dispute Resolution Team, who would be glad to help.
Please note that this information is for guidance only and should not be regarded as a substitute for taking full legal advice on specific facts and circumstances.