Force majeure and frustration in the context of Covid-19

Non-performing parties may seek to rely on contractual force majeure provisions and/or the common law rules on frustration so as to avoid liability for what would otherwise be a breach of contract. This note provides an overview of the rules on force majeure and frustration.

Force majeure clauses

Force majeure clauses are an agreement between contracting parties that their contract may be varied or suspended in specified exceptional circumstances. The scope and effect of a force majeure provision will depend on the words used, as interpreted in the context of the contract as a whole and the admissible factual background. This means that disputes are likely to turn on the drafting of the relevant provision and the specific facts of each case.

Nonetheless, it is possible to identify certain key features of force majeure clauses and how they are likely to operate in the context of the Covid-19 pandemic. These are discussed below.

What will the party seeking to rely on a force majeure clause have to prove?

Depending on the wording of the relevant provision, a party seeking to rely on a force majeure clause will typically have to prove that:

1. The Covid-19 pandemic (or the consequences of it) falls within the scope of the force majeure clause, whether because there is an express reference to epidemics or pandemics (or similar) or because the pandemic is caught by more general language in the force majeure clause. Given the severity and unusual nature of recent events, it may well be that general “sweep-up” language will cover the pandemic, unless the specific language used in the rest of the clause is directed at a different type of situation altogether.
2. Covid-19 affected the performance of the contract to the extent/in the way specified by the force majeure provision. For example, if a force majeure clause stipulates that it will be triggered if a force majeure “prevents” performance of the contract, this is likely to require that performance is physically or legally impossible. By contrast, a requirement that the specified event should “hinder” or “delay” performance of the contract sets a lower bar. In either case, the fact that it has become more expensive to perform a contract is, without more, unlikely to be sufficient.
3. It has taken reasonable steps to mitigate the impact of Covid-19 on performance of the contract. In particular, a problem caused by Covid-19 is unlikely to be “beyond the control” of a party if it could have taken steps to resolve it.
4. Covid-19 was the effective cause of the relevant party’s failure to perform the contract. If there is another reason for the failure to perform, which falls outside the scope of the force majeure clause, the provision is unlikely to apply. Equally, a force majeure clause is unlikely to be triggered if Covid-19 has prevented one method of performing the contract but alternative methods of performance still exist (although, as always, this will depend on the drafting of the relevant provision).

What happens if a force majeure clause is triggered?

A well-drafted clause will identify the consequences of a force majeure event occurring. As a minimum, the contract (or parts of it) will typically be suspended and the non-performing party will usually be excused liability while the force majeure event subsists. Some clauses go further and allow one or both parties to terminate the contract (either immediately or after a specified period of time). The clause may also impose general or specific obligations to try to resolve the problem. There may be an obligation on parties to cooperate to find a solution, although issues may arise as to whether these provisions are sufficiently certain to be enforceable.

Notice

A force majeure clause may require the non-performing party to notify the other party on the happening of a force majeure event. Depending on the drafting, this may be a pre-condition to the right to rely on the provision. In that situation, a failure to notify in the prescribed manner will result in a party being unable to rely on the provision.

In other cases, a failure to notify will not prevent a party from relying on a force majeure provision and the only consequence will be a potential damages claim (if the other party has suffered a loss). The courts have not always taken a consistent approach to the interpretation of notice provisions, and clearly the safest course of action is to ensure strict compliance with any notice provisions in the prescribed manner and as soon as possible.

Frustration

In the absence of an applicable force majeure clause, a non-performing party may seek to rely on the common law concept of frustration and to argue that the spread of Covid-19 is a “supervening event”, which has brought the contract to an end and released both parties from further performance of it.

Frustration is generally regarded as being a limited concept, which can only be invoked rarely. However, some of the limits on frustration, which prevent it from applying in more usual circumstances, may be less of an obstacle in the current crisis. For example, a contract will not normally be frustrated if the relevant event was foreseen at the time that the parties entered into their contract. Given the rapid spread of Covid-19, it is unlikely to have been foreseen by the parties other than in very recently concluded agreements.

When will a contract be frustrated?

A contract may be frustrated where an event occurs which renders performance impossible or which transforms the relevant obligation into a radically different obligation from that agreed to when the parties entered into the contract. This test may be satisfied if the commercial purpose of the contract is no longer achievable. Delay caused by Covid-19 could in principle be a frustrating event, depending on the nature of the contract in question and the length of the delay.

The focus will be on the parties’ specific contractual obligations and whether they have ‘radically changed’ as a result of the spread of Covid-19 to the extent that requiring a party to comply with its strict contractual obligations would mean requiring it to do something fundamentally different from that which it originally promised to do. In other words, it will be important to identify the consequences of the pandemic on the parties’ ability to perform the specific contract in question. It is unlikely to be sufficient that circumstances have changed in society generally or that performance of the contract has become more onerous or expensive or even uneconomic.

The rules require that the “supervening event” must not be the fault of the non-performing party. Clearly, contracting parties cannot be held responsible for the spread of Covid-19 but the court may nevertheless take the view that a failure to perform a contract is a result of the non-performing party’s acts or decisions (albeit ones taken in light of Covid-19). As the law stands, where a catastrophic event means that a party can comply with its obligations to some of its contractual counterparties, but not all of them, and it has to choose between them, it will not be able to argue that contracts which it has chosen not to perform have been frustrated. The court is likely to take the view that the failure to perform the relevant contract was “self-induced” by the non-performing party’s decision not to comply with that particular contract.

“Supervening illegality”

If performance of a contract becomes unlawful as a result of changes in the law implemented after the contract was entered into, this will usually be a frustrating event. Therefore, if the government passes legislation to deal with Covid-19, which makes performance of certain contracts unlawful, those contracts are likely to be frustrated. 

Unpredictable outcomes

It has been held that the “object of the doctrine [of frustration] was to give effect to the demands of justice, to achieve a just and equitable result, to do what is reasonable and fair, as an expedient to escape from injustice where such would result from enforcement of a contract in its literal terms after a significant change in circumstances.”^₁

This demonstrates that there is a degree of flexibility in the rules, which is to be welcomed in the current circumstances. However, it also means that each case is likely to turn on its own facts and outcomes may not be predictable. The law of frustration tends to develop in times of crisis and it is likely that the rules will be revised as disputes come before the courts.

The effect of frustration

The effect of frustration on a contract is that it comes to an end automatically (i.e. without the choice or election of either party). There is no need to notify the other party (although this will usually be sensible). Frustration does not allow for the suspension of contracts, which means that it is a somewhat blunt instrument.

As the contract has come to an end, both parties are excused from all further performance of their future obligations. All sums paid by a contracting party before the frustrating event will be repayable, subject to the court’s discretion (broadly) to give credit for expenses incurred or benefits provided by the other contracting party.

Relationship between force majeure clauses and the doctrine of frustration

Parties to a contract can agree to exclude the doctrine of frustration. A force majeure clause, which deals “fully and completely” with an event that would otherwise frustrate the contract, is capable of amounting to an agreement to exclude the doctrine of frustration.

However, the more catastrophic an event, the less likely it is that a force majeure clause will be taken to have dealt “fully and completely” with that event. Given the severity of the current crisis, therefore, there may be scope for arguing that a contract has been frustrated, even though it contains a force majeure clause.

¹ Lauritzen AS v. Wijsmuller BV, The "Super Servant Two" [1990] 1 Lloyd's LR 1 at 8.