Corporate Law Update

This week we look at an interesting case where one party to a commercial contract tried to claim that the contract had come to an end automatically (under the doctrine of frustration) due to civil unrest in the local area.

Contract was not cancelled due to riots and protests

The High Court has held that a contract to provide theatre services was not “frustrated”, and so the parties were not relieved of their obligations, due to civil unrest in the venue country.

The case gives useful guidance on when a contract will or will not come to an end by events outside the parties’ control. It is also a reminder of the benefit of including a well-drafted force majeure clause.

What is “frustration”?

Frustration is an English legal concept which states that, if something happens that makes it physically or commercially impossible to fulfil a contract, or radically changes the contract parties’ obligations, the contract will automatically fall away and end.

Because frustration significantly affects a contract (by effectively killing it), the courts are very careful about applying it. They will find that frustration occurs only when something happens which is outside of the parties’ control and contemplation and which strikes at the very heart of the contract.

For this reason, commercial parties often include “force majeure” (or FM) provisions in their contracts, which set out what should happen (and whether the parties are liable) when unexpected events occur.

What happened here?

In The Flying Music Company Limited v Theater Entertainment SA and others, Theater Entertainment SA (“Theater”) entered into an arrangement with The Flying Music Company Limited (“Flying Music”). Theater would secure venues for a run of the well-known Thriller – Live! musical in Athens and Thessaloniki, Greece in 2010. Flying Music would provide the performers, for which Theater would pay a fee.

As it happened, the performance dates coincided with the period of serious civil unrest in Greece caused by the imposition of austerity measures in return for financial support from the EU and the IMF.

As a result, ticket sales for the performances were very low indeed, the ticket price had to be substantially reduced and many performances in both Athens and Thessaloniki were cancelled.

To begin with, Theater paid the fee to Flying Music, albeit in small instalments. However, ultimately the income began to dry up and Theater was unable to make any further payments. Flying Music brought a claim to recover the unpaid fees, either under the contract or under a personal guarantee given by Theater’s managing directors.

In response, among other things, Theater claimed that the contract had been frustrated by the significant riots and protests in Greece, and that they were not obliged to make any further payments. It and its directors provided extensive evidence of the scale of civil unrest in the two cities.

What did the court say?

The court did not agree that the contract had been frustrated. It gave two key reasons:

  • The contract was not signed until late May 2010, but there had been significant unrest for the whole of May. Theater and its directors were therefore well aware of the possibility that unrest would continue before they signed the contract, and they made their bargain on that basis.
  • Although there was significant unrest in both cities when the performances were due to take place, it actually began to ease off and the demonstrations became smaller after the contract was signed. It was difficult to say that the unrest escalated to the point where it became completely different from what had happened earlier in May.

Practical implications

We don’t see many cases on frustration, principally because it is such a hard doctrine to invoke. This was a spirited effort by Theater, but ultimately the court was not going to absolve it of liability under the contract when it had entered into the deal with its eyes open.

The judgment is a good reminder, however, of some key points:

  • In any longer-term commercial contract, consider including a force majeure clause to deal with unexpected events. The courts will not apply the doctrine of frustration easily.
  • Consider listing specific categories of events that the parties consider particularly likely.

    A typical FM clause will refer to a rather bleak panoply of natural disasters, epidemics, civil unrest and war. However, contract parties are free to choose what events will trigger their FM clause.

    There is often debate over including events that are arguably within a party’s control, such as foreseeable government actions, industrial action, failure in utility or supply chains, and IT failures. Including anything the parties consider particularly relevant may help to avoid disputes later.
  • If there is on-going disruption when the contract is signed, consider including more specific mechanisms that will come into effect if the disruption continues or gets worse, rather than relying on an FM clause.
  • An FM clause is a form of exclusion clause. The burden of proof will be on the party relying on it. The clause may even be void under the Unfair Contract Terms Act 1977 if it is not reasonable or (in a consumer contract) under the Consumer Rights Act 2015 if it is not fair and transparent.