As the coronavirus outbreak is increasing rapidly by day, more uncertainty and difficulty for enterprises and businesses are born particularly in regard to the performance of contractual obligations. Herewith, more and more businesses and organisations are now inevitably looking at their contracts to see what impact the coronavirus outbreak will have and how they can mitigate and navigate the challenges brought by the pandemic. Ultimately, businesses worldwide are considering whether they can or should rely on the force majeure clause, if there is one in the relevant contract, or the common law doctrine of frustration as legal mechanisms to manage the impact of the crisis on their business and see what possible remedies might be available at the end.
In English law, the doctrine of frustration and force majeure are two legal mechanisms that allow the contractual parties to be released from their obligations under the contract and neither party may sue for breach. Generally, force majeure can only be relied on if it is expressly incorporated into the contract and if there is no force majeure clause, the affected party may be able to rely on the doctrine of frustration which is implemented by the operation of law. This article aims to evaluate whether the ongoing global coronavirus outbreak can trigger the doctrine of frustration or force majeure under English law. In order to make a conclusive assessment, first the concept of frustration and force majeure under English law must be understood:
i. Doctrine of Frustration
Under English law, the doctrine of frustration allows both parties of a contract to be discharged from their contractual obligations when an unforeseeable event occurs and renders the performance of contract impossible. Frustration requires that an unforeseeable subsequent event outside of the capacity and autonomy of the parties has made the contract impossible to perform, or has transformed the performance of the obligations under the contract so significantly from that which the parties intended when entering the contract, that it would be unjust to expect the parties to continue with the contract and hold them to their obligations.
The test for frustration requires: a) the event occurring after the contract has been formed, b) the event is beyond what was envisaged by the parties when entering the contract and is fundamental, c) neither party if at fault and d) the event renders the contract performance impossible. Where a contract is found to be frustrated, both parties are released from their obligations under the contracts and neither party may sue for breach. It is important to also note that the frustrating event merely making the performance more difficult or costly is not enough to meet the frustration threshold. It is unlikely to be able to argue successfully that a contract is frustrated if it is only more difficult or expensive to perform; as demonstrated in the case Davis Contractors Ltd v Fareham Urban District Council where the House of Lords held that the fact that a contract becomes more difficult to perform or not so profitable is not sufficient to amount to frustration.
Although the purpose of this doctrine is to prevent unfairness where there has been an irrevocable change in circumstance and neither party is at fault in this manner, the test for frustration is very strict thus very difficult to prove. In practice, it is seen that very few cases where a contracting party has successfully claimed that a contract has been frustrated.
ii. Can the COVID-19 outbreak frustrate contracts under English law?
The key question in order to determine this is whether the coronavirus outbreak has resulted in making the performance of a contract impossible or merely more difficult. While the latter scenario will not constitute a frustrated contract, the first scenario may be sufficient to amount to frustration. For instance, if the coronavirus outbreak only delays performance of a contractual obligation or increases the cost of doing so it is highly unlikely that frustration will be found. Similarly, if the coronavirus outbreak results in a delay of shipping or delivery of goods, in contrast to a temporary blanket ban on importing and exporting goods implemented by the government, it is more likely to be held as a force majeure event rather than a frustrating one.
This is where the importance of distinguishing between arguing frustration or force majeure can be found: generally where a contract contains a force majeure clause that includes specifically issues such as global pandemic and epidemics, frustration will not apply on the basis that the parties have already failed to meet the “unforeseen event” requirement for the doctrine of frustration since they considered the issue and incorporated it into the contract. However, if the force majeure clause of a contract is not provided in full, complete or specific enough then it may still be possible to invoke frustration.
iii. Force Majeure
In contrast to civil law, English law does not define force majeure either in statute or under case law, therefore the legal concept of force majeure depends for its existence and effects on the contract itself. To define, force majeure clauses are contractual clauses which alter parties’ contractual obligations and liabilities when an extraordinary event or circumstance beyond their control prevents their performance.6 Importantly, the fact that force majeure clauses are contractual clauses mean that the parties can only rely on this concept if they have provided it expressly in the contract and it will not be implied into the contract. This also gives rise to the issue that whether a particular clause is triggered will depend entirely on the words that have been used by the parties when entering into contract, which is a reason why in practice, force majeure clauses are often carefully drafted and comprise of non- exhaustive lists. Failure to state what constitutes force majeure in the contract means that a supervening event which prevents performance will not be caught as a force majeure event so as to provide release from performance, simply because it was not named as a qualifying event in the contract.
Force majeure clauses are interpreted narrowly, and the burden of proof lies on the party invoking it, meaning that the party claiming the force majeure clause is triggered, must prove the event in question falls within the scope of the clause under the relevant contract. If successfully invoked, the affected party may be excused from performing its obligations under the contract thus avoiding a breach of contract which could result in damage and detrimental liability. Depending on their structure, these clauses may impose a variety of effects on the parties such as releasing the affected party from performing the contract in whole or in part; from delay in performance or giving them the right to terminate the contract. Due to the fact that force majeure is not a creature of common law, it differs from some other civil law legal systems where the courts may declare that a particular event such as the coronavirus outbreak constitute force majeure.
iv. Does the coronavirus outbreak constitute as force majeure?
Since the concept of force majeure only exist via contracts under English law, every force majeure clause should be interpreted separately and in accordance to the contract which it is incorporated in. Hereby, it is easy to see that where clauses that expressly include a pandemic, epidemic or communicable disease as an iterated example of events giving rise to force majeure, there is a higher chance of successfully arguing that COVID-19 outbreak is a force majeure event. On the other hand, where the clauses fail to include pandemic or communicable disease in the list as examples the affected party will have to firstly demonstrate that the COVID-19 outbreak falls within the scope of that clause and is force majeure within that provision.
In the event that COVID-19 falls within the scope of a force majeure clause of a contract, the affected party must show that:
a) The COVID-19 outbreak has rendered the contractual performance impossible; and
b) The COVID-19 outbreak and its consequences were beyond reasonable foresight and control of the parties when they entered into contract.
Since the COVID-19 outbreak is an unprecedented circumstance, it is fairly possible to argue that the parties could not have specifically foreseen it and incorporated it under the force majeure clause of the contract. It is also reasonably fair to argue that the World Health Organization’s recent classification of COVID-19 as a pandemic would result in this outbreak as being within the scope of those force majeure clauses that include pandemic or epidemic in its list. However, even if the courts acted generously when interpreting the wording of such clause, the affected party must still demonstrate that their non-performance was outside of their capacity and control and could not have been prevented or mitigated. Therefore, just because a force majeure event has occurred and falls within the scope of the clause does not necessarily mean that the parties will be released from liability for failing to perform or delay in performance.
v. Can frustration and force majeure work together?
Generally, if there is a force majeure clause within the contract and it covers all of the elements than the doctrine of frustration will not (and cannot) apply. Considering to the current case of COVID-19 outbreak, if a product is due to be shipped from a country to the UK but that country is in lockdown and not allowing flights or shipments to the UK, the performance of the contractual obligation that is shipment to the UK is rendered impossible. Therefore, in this case, the first step towards determining whether the contract will be affected by the COVID-19 outbreak is to consider the force majeure clause of that contract and interpret the force majeure events within the scope of that clause and from its wording. If the force majeure clause is incomplete, for example in regard to the cost allocations, the doctrine of frustration may be applied in addition to the contract. If there is no force majeure clause at all, the doctrine of frustration may apply and the provisions of the Law Reform (Frustrated Contracts) Act will assess and determine the position on recoverability.
Both force majeure and frustration allow parties relief from their obligations and liabilities but while force majeure event may not result in the contract being terminated and simply relieves the party from performing the obligation subject to force majeure, frustrating event results in automatic termination of the contract and both parties are released from all contractual obligations. However, it is crucial to emphasize the fact that the consequence of wrongfully arguing frustration may cause severe damage including a repudiatory or anticipatory breach of contract which may result in the counterparty terminating the contract and claiming damages. In the event that frustration is successfully argued, as a general matter, any rights accrued prior to frustration will remain enforceable however subject to certain exceptions, any rights which had not accrued as at the time of frustration will be unenforceable once the contract is discharged.
Due to the COVID-19 spread developing from a local outbreak to a global pandemic, the impact it will have on businesses and particularly commercial contracts seems inevitable. As vital mechanisms to excuse a contractual party’s non-performance or justify termination of a contract, the question is whether one can rely on force majeure or the doctrine of frustration in English law. It is clear from the above that the impact of COVID-19 outbreak on contractual performances is inherently contract specific. While both are similar legal concepts under English law, they give rise to radically different outcomes: force majeure clause excuses a contractual party from not performing its obligations under the contract and do not hold them to any liability whereas the doctrine of frustration automatically discharges both parties from the contract if it is successfully argued.
Above all, an incorrect assertion of force majeure or frustration may result in a breach of contract which depending on the level of breach being anticipatory or repudiatory, allows the counterparty to be able to claim damages or even the termination of the contract. Therefore, we strongly advise that if you are in doubt of where your position stands in relation to your liability and obligation under a contract during the coronavirus pandemic, you should seek legal advisory before commencing any courses of action.
As Guden, we are happy to offer our services in this area to those who are seeking guidance in relation to their liabilities and obligations under a contract during the COVID-19 outbreak. For further information on coronavirus outbreak as force majeure and its impact on contractual performances under Turkish law, please see our related article here.
By Ali Guden, Partner, and Doga Girinti, Legal Counsel, Guden