FM and Frustration

An Update on force majeure and doctrine of frustration in English Law

Contractual parties create duties and obligations enforceable on themselves by bounding with a contract.^[1] The former rationale was given to define the rule that any failure in performing the contractual duty undertaken result in a breach of contract.^[2] Blackburn J. in Taylor v Caldwell,^[3] in a paragraph that has often quoted, stated that in relation to the equitable remedies:

“… parties when framing their agreement evidently had not present to their minds the possibility of such a disaster and have made no express stipulation with reference to it, so that the answer to the question must depend upon the general rules of law applicable to such a contract.”

Therefore, claim damages should be compensated if a clause prescribing what is to be done in the case of a breach could be inserted. On the other hand, under a valid contract, an incident sometimes happens which is not arising from the fault of the either party but which has a significant effect on the contractual parties’ obligations due to forces beyond their control.^[4] Under these circumstances, parties seek protection for their rights and legal remedies for breach of contracts. In this regard, one of the most important purposes of the contract law is providing the Parties variety of legal tools to be ensured them a moderate degree of certainty by allocating the risks. However, the non-performance of any contractual party might be excused, despite internationally recognized principle of pacta sund servanda,^[5] on the basis of force majeure, doctrine of frustration, hardship or other legal mechanisms in accordance with the applicable substantive law. According to the main areas of focus in this study, force majeure clause, simply a risk allocation clause, attempts to cover the unanticipated and unforeseeable. Similarly, under a physically and commercially impossible contract parties’ obligations have been discharged on the basis of frustration. In order to differentiate between force majeure clause and frustration, we have to define exactly what we mean by these doctrines and examine their effect on the contractual relations of the parties.

Force majeure excuse

The force majeure exemption, a doctrine of French law, is a concept of defence deriving from an obstacle to performance beyond the debtor’s control for which the debtor did not consider the incidence risk. The force majeure excuse can easily be associable with all sorts of non-performance such as delay, or partial or inadequate performance or complete failure. To characterize as force majeure, there are several prerequisites. First, the occasion has to be external which means that it is attributable to the obligor or its business. This obstacle must have not been reasonably foreseeable, resistible or superable.^[6] Finally, the event must render the performance of the obligation impossible.^[7] Absence of fault is not required but the presence of fault in respect of the occurrence of an obstacle prevents the appeal of the exemption.^[8]

Force majeure (“FM”) incidents can emerge from natural, social, economic and legislative reasons such as embargoes, a war, earthquake, import prohibitions, etc. In practice the former reasons most frequently cause late performance or complete non-performance of any obligation arising out of or in connection with the contract. The requirements and the consequences of force majeure excuse definitely rely on what the contract says. A force majeure clause should be drafted as follows:

“A Party shall not be considered to be in default or breach of this Agreement, and shall be excused from performance or liability for damages to the other Parties, if and to the extent it shall be delayed in or prevented from performing or carrying out any of the provisions of this Agreement, arising out of or from any act of God, labour disturbance, sabotage, act of the public enemy, war, invasion, insurrection, riot, fire, storm, flood, ice, earthquake, explosion, epidemic, breakage or accident to machinery or equipment or any other cause or causes beyond such Party’s reasonable control.”^{^[9]}

There has been a long-lasting discussion whether a force majeure clause is a legal tool for excusing non-performance, exclusion or exemption clause. Denning L.J.’s solution in Karsales (Harrow) Ltd. v Wallis^{^[10]} are noteworthy that one is to meticulously review the contract on the basis of the context and imposition of the terms on the parties. This is the only way that the Court should then recognize whether the clause provide a justification or excuse to a breach of obligation.

1.1. Results of force majeure

In the core, the force majeure clause draws the borders of the force majeure events intended to cover. Thus, it partially or temporarily excuses the debtor from damages. At that point the context of the FM clause, the drafting of which utterly depend on the contractual parties, are of great importance for determining the events, caused a breach of duty as non-performance, delay or malperformance. If the parties’ purpose is to limit the covered events and provide no chance of any interpretation, the list of specific events has to be drafted and the provision of “FM shall be limited to the following and only insofar as there is a substantive effect upon the performance of the contract” will be incorporated into the force majeure clause. Conversely, due to the high risk of omitting to cover the eventualities, contractual parties should draft a sweeping-up clause to, such as “any other cause or causes beyond the parties’ control”.^[11] The rights and the obligations when FM event happened should be designated in the clause. The followings^[12] are the most common releases:

After the given notice, activating the clause, either party have a right to terminate without any liability on either side or the clause shall provide only a unilateral right for the contract termination,^[13] or
Till the end of the force majeure event the performance of the affected party shall suspend without liability with respect to delay and will be re-activated when the situation is going to be normal, or
The affected party has a right to seek a time extension for performance without any liability for delay damages.

Depending on what your contract says, the validity of FM claim is determined, then the procedure explained in the relevant contract must be followed. A plea of force majeure for justifying to excuse damages does not affect the ongoing contract existence. However, when the FM event makes the performance of obligation to be objectively impossible after a certain time period, the contract may be terminated by the parties or rescission of contract might be used by the court. Since rescission bring the contract to an end with retrospective effect, it offers an unequitable restitution to the parties. Therefore, in the event of force majeure, the benefits received might be inequitable when one party has still not received any benefit.

1.2. Force majeure in English law

Force majeure clauses are usually used in international commercial contracts. The reason why parties negotiate the types of the event included for non-performance is to reach enough coverage that is not provided by the applicable domestic law.^[14] Although most commercial contracts’ applicable law is English law or the seat of the arbitration under dispute resolution clause will be held in London, the force majeure doctrine as a continental doctrine is a stranger to English common law.^[15] Interestingly enough, force majeure doctrine has been neither defined nor recognized by the courts in the meaning of international understanding. But, parties, choosing English law as an applicable law, have long been forced English courts to attach some meaning. The problem clearly set forth by McCradie J. in Lebeaupin v Crispin^{^[16]} that the Courts should construe each word and pay close attention to them with due regard to the general terms of the contract. Only then, the debate shall be made regarding what has ‘held on the construction of a particular contract to amount to force majeure’ and explained the essential circumstances as all of them beyond the will of man and which it is not in his power to control.^[17]

English courts approach the FM clause without citing the general contract principles, ‘with the presumption that the expression force majeure is likely to be restricted to supervening events which arise without the fault of either party and for which neither of them has undertaken responsibility.’^[18] In English law, usual occurrences affecting the work such as bad weather, breakdown in machinery or funeral do not sufficiently amount to constrain the performance of the obligation as constituting force majeure. An occurrence, therefore, will constitute a force majeure excuse if an unforeseen and irresistible act must legally or physically restraint the performance of the contract.^[19] Therefore, force majeure clauses shall cover both the events, completely prevent the performance and the events which solely obstruct or delay the performance. The root test regarding force majeure provision whether the agreed circumstances beyond the control of the obligor result in non-performance or varied performance shall be performed for determination to consider force majeure instead of relying on the frustration doctrine.^[20]

Equally important, due to the narrow interpretation of English courts, the party who triggers the FM mechanism has to prove the occurrence lies within the scope of the qualifying events in the contract. Despite force majeure excuse is applied all types of non-performance cases, forming a non-exhaustive list and sustaining the integrity of the entire wording of the clause by well-designed drafting prevent the failure of including the supervening event as a qualified force majeure event which provides relief from performance.^[21]

It is important to bear in mind that if successfully invoked, FM clause, depending on its structure, may present to the affected party more sophisticated solutions as follows; the extension of time being granted to obligor, chance to issue variation for particular cases or suspension of contract, issuance of credit note for paid amount, and termination if the impossibility of performance lasts beyond agreed period rather than an automatic.

2. The concept of frustration

Frustration, something vitiating the contract, is the most difficult doctrine to define. As the juridical basis is vague, parties have exceptionally convinced the courts to give its decision on the ground of this doctrine and English law rarely notices that some events lead to ‘frustration’ of the contract, the consequences of which may the parties’ relief of contractual obligations and money or property recovery or indemnity for the work done till frustrating event.^[22]

2.1. Appearance of frustration

According to the classic theory, all is based on what the parties intended at the time of the contract.^[23] In Paradine v Jane^[24], the court held that the contract was not frustrated due to the invasion of the property so the party who failed to perform his duty would be in breach of contract because the unpaid rent as a contractual duty was binding upon the promisor notwithstanding the event occurred.^[25] In accordance with a hell or high water aspect if one creating a duty himself under a contract, he has to remedy the breach regardless of the cause. In this line of thought, even if the obligations in the former case were not discharged by a ‘frustrating’ event on the ground that the settled eventuality within the contract, under the wind of freely negotiated bargain and freedom of contract, doctrine of frustration has arisen from the decision in Taylor v Caldwell^[26]in which Blackburn J. stated that parties have made no express stipulation regarding the possibility of a disaster when drafting their agreement and added, “… as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without fault of the contractor.”The decision proved that the continued existence of implied condition perishing of which cause the non-performance was the main source of the doctrine of frustration at that time. Then, the following cases extended to commercial transactions which is called ‘frustration of the common venture’.^[27]

Under the English Law, where a contract has become physically and commercially impossible of performance after it has been formed as a valid contract, the parties have been discharged on the ground of frustration from performing the further obligations of the contract.^[28] Needless to say, the scope of the doctrine should be narrow. A well-defined description regarding ‘Frustration’ was made by McKendrick as follows:^[29]

“A contract may be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract.”

The character of this doctrine is not subject to be confined by an arbitrary rule.^[30] It was set forth as a tool both to satisfy the demand of justice by reaching ‘just and reasonable result’ and to ‘escape from injustice where such result from enforcement of a contract in its literal terms after a significant change in circumstances’.^[31]

2.2. Legal basis of frustration

When legal basis of frustration is taken into account, ‘at least five theories for the doctrine of frustration have been put forward at various times’.^[32] At first, the linkage between the frustration concept and the classic theory positing that the parties’ intention at the time of the contract is the proper basis of contractual obligation was established to form a legal basis. The doctrine, therefore, depended on the presence of an implied term.^[33] Blackburn J. relied on the implied term theory that even if it is not expressed, particularized consequences will derive from the unforeseen event affecting the character of the parties’ obligations. Second theory was argued on the ground of ‘a total failure of consideration’ by the counsel for the respondent in Taylor v Caldwell^{^[34]}. However, in Davis Contractors Ltd v Fareham UDC, Lord Radcliffe set forth the weakness of implied term theory that:

“…there is something of a logical difficulty in seeing how the parties could even impliedly have provided for something which, ex hypothesi, they neither expected nor foresaw; and the ascription of frustration to an implied term of the contract has been criticised as obscuring the true action of the court which consists in applying an objective rule of the law of contract to the contractual obligation which the parties have imposed on themselves.”^[35]

After the “frustration of adventure” formulation in Jackson v Union Marine Insurance Co. Ltd^{^[36]}, Lord Sumner reformulated the previous doctrines as a “device (sic) by which the rules as to absolute contracts are reconciled with a special exception which justice demands”.^[37] The ‘construction theory’ was derived from the Lord Loreburn’s answer to the question in Tamplin Steamship Co. Ltd. v. Anglo Mexican Petroleum:^[38] What in fact is the true meaning of the contract. According to that, it can be inferred from the character of the contract and surrounding circumstances that a term, though not necessarily expressed, was a basis on which the parties contracted. He was of opinion that parties ‘should be excused if substantially the whole contract became impossible of performance, or in other words impracticable, by some cause for which neither was responsible’.^[39] His investigation in accordance with the nature of the contract was whether the contractual obligations’ practice would turn to something ‘radically different’ under the alleged frustrating event. In Davis Contractors Ltd. v. Fareham U.D.C.^{^[40]} Lord Radcliffe ascertained the construction theory that

“… Frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. … It was not this that I promised to do … There must be … such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.”

The construction of the contract approach necessitates a fundamental change in the contractual promise. How is it decided whether a fundamental change in contractual commitment occurs? First, the court should find out the extent of the original contractual commitments through the nature of the contract and the relevant surrounding circumstances. This extent presents the requirements for the parties to perform their actual rights and/or obligations. Second, when the alleged event, frustrating the contract, occurred, it is essential to ascertain ‘what the new obligation would be if the contract were still binding in the new circumstances?’.^[41] Finally, the court should determine the difference between original obligations and the new obligations to ensure whether the new promises are a fundamental change or not. When the fundamental change is detected, both parties must be discharged from further performance.

However, none of the theories were capable of quite clearly justifying the doctrine of frustration. Last but not least, the ‘multi-factorial’ approach has become established as a substantive and a prominent theory for the modern doctrine of frustration. In Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage and Towage) Lid, The “Sea Angel”,^[42] Rix LJ detected that ‘the question of what the constant is’ should be answered as the true construction of the contract. Therefore, the distinguishing point of this approach from the classic construction theory is that “it is not the fact of radical difference between what the parties agreed in the contract and performance of that contract in the unforeseen and purportedly frustrating circumstances that justifies the contract’s frustration, but the court’s view of that difference”.^[43] In The Sea Angel decision, one of the most important judgments in this century includes consideration of:

“the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances, Since the subject matter of the doctrine of frustration is contract, and contracts are about the allocation of risk, and since the allocation and assumption of risk is not simply a matter of express or implied provision but may also depend on less easily defined matters such as “the contemplation of the parties”, the application of the doctrine can often be a difficult one. In such circumstances, the test of “radically different” is important: it tells us that the doctrine is not to be lightly invoked; that the mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.”

In other words, the assumption and allocation of risk under the intent of parties not only appeared as express and implied terms in the contract but based on “the contemplation of parties” as well.

All these theories may shed light on the question as to whether it is possible to classify particular events that have been admitted by the courts as amounting to frustration of the contract. The first category is the destruction of the subject matter after the contract has been made. Complete destruction is not essential, but frustration occurs when the contract shall become impossible to perform, illegal or radically different from which was intended. In Asfar v Blundell,^[44] cargo of dates was considered to have destroyed either due to destruction of the subject matter or to have changed so significantly that they are not the same goods. In Barrow Lane v Phillip,^{^[45]} the contract was frustrated due to the irreversibly lost goods which also evaluated to have perished. Second, if the contract relies on a particular event occurring, the cancellation or postponement of that event may frustrate the contract. In a well-known Krell v Henry case, A party’s duties are discharged where a party’s objective is frustrated without fault by the occurrence of an event, which the non-occurrence of which was a basic assumption on which the contract was made. Third, in very recent case of Canary Wharf (BP4) T1 ltd and others v European Medicines Agency^{^[46]} the defendant argued that the Brexit frustrated the purpose of the lease contract on the grounds of common purpose and supervening illegality. It is particularly significant to explain that the supervening illegality means the performance of the contract to become illegal due to the series of occurrences. Defendant claimed that the Brexit both represented unlawful actions which were once lawful and prevented the common purpose of using the lease throughout the term. Marcus Smith J. conceded that there was no common goal between the parties except the lease and legal effects of Brexit on the defendant was evaluated as ‘self-induced’ frustration which could not bring the contract to an end.^[47] Lastly, after the contract is entered into force between the parties, some circumstances such as declaration of war, Government’s requisitioning of property, change in law etc. radically and fundamentally altered the contract and consequently it was frustrated.^[48]

Other forms of occurrence have also been frustrated the contract. It would seem safe to say that the most significant matter is not the nature of the occurrence but the effect of that occurrence on the contract showing the parties intention at the time of the formation.

3. Their relationship under comparative assessment

In general non-performance means any failure to perform under whatsoever cause. From legal perspective it covers a breach of all performance-related obligations arising out of or in connection with the contract. Failure in the promised performance might cause aggrievance for both parties. It would seem safe to say that in the event of non-performance reparation has to be made of benefits obtained by each party.

When the doctrines are taken into account, two significant distinctions appear between frustration of contracts in consequence of impossibility, on the one hand; and, force majeure clauses, on the other. Primarily, force majeure excuses and related reliefs largely might be given for the purpose of contractual remedy in the civil law systems. whereas in common law jurisdictions, the doctrine of frustration of contracts by reason of impossibility lies as a matter of law beyond a contractual prescription. So do the consequences.

Even though force majeure exemption may be applicable in the contract in dispute, frustration of contracts originating from the impossibility of performance of such contracts lies as a legal reality out of the contractual context. Here we attempt to analyse whether the well drafted force majeure clause is an obstacle to invoke frustration. Some Academics suggest that the presence and the context of the force majeure clause adversely affects any assertion related to the frustration. In other words, if a comprehensive FM clause designs the list and type of excusing events, it is not possible to claim that the excusing event construes the performance of the contract thoroughly different from which was assumed at the time of contracting.^[49] Moreover, it can be complicated to formulate how a frustrating event was honestly unforeseeable when most of the contracts now define the events within the extent of force majeure clause. Mocatta J. accepted above assertion that it was not possible for the doctrine of frustration to apply due to the suitably drafted force majeure clause in the contract.^[50]

On the other hand, despite court’s refusal to apply frustration on the basis of the presence of a comprehensive force majeure clause, exercise of doctrine of frustration is widely recognized even if parties draw up a contract with language of force majeure. No one doubts that even if these two legal principles are quite different from each other based on their legal provisions, activated occurrences’, consequences etc., the FM clause does not preclude the engagement of doctrine of frustration to the occurrence.^[51]

Unlike force majeure, the doctrine of frustration applies where a supervening event, which has not been expressly referred in the contract, renders the performance of the contract impossible or illegal, or radically changes the nature of the parties’ rights and obligations. Therefore, it is unjust to exclude the operation of frustration supposing the elaborated force majeure clause. Contrary to this fact that it is commonly recognized that contract is deemed as frustrated where there was foreseen event at the time of drawing up a contract or where express provision has been drafted in the contract for the asserted frustrating event. In Metropolitan Water Board v Dick Kerr and Co. the claimant asserted that the contract had not been frustrated since delay clause had expressly been made as “whatsoever and howsoever occasioned”.^[52] However, Lord Finlay L.C. assessed that the phrase “whatsoever and howsoever occasioned”, tending literally to cover the delay, did not “cover the case in which the interruption is of such a character and duration that it vitally and fundamentally changes the conditions of the contract, and could not possibly have been in the contemplation of the parties to the contract when it was made”.

To put it bluntly, setting the doctrine of frustration completely back by even drafting a very large extent might be probable but remarkably difficult as any large-scale force majeure exemption is not able to cover all catastrophic events that man can imagine. Moreover, as the most common relief of force majeure clause except to the extent that it lasts for so long, is the extension of time which enclose the scope to temporary disruptions in performance, the affected party solely relying upon force majeure clause could not take the advantage of releasing from the performance of the contract. In conclusion, the lesson to be learned from the former legal relationship is that doctrine of frustration has never lost its significance for the affected parties who face difficulties to invoke the force majeure clause which is not suitably drafted or not expressly take part in the contract or negligently omitted.

[1] Paradine v Jane [1647] EWHC KB J5.

[2] See, for example, the Justices stated in Paradine v Jane: ‘where the law creates a duty or charge, and the party is disabled to perform it without any default in him, and hath no remedy over, there the law will excuse him; but when the party, by his own contract, creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract.’

[3] Taylor (n 6).

[4] R Saul, R Barnes and M Elliott, ‘Is climate change an unforeseen, irresistible and external factor – A force majeure in marine environmental law?’ (2016) 113 Marine Pollution Bulletin 25.

[5] Even if sanctity of treaties originated from the international law and the law of treaties, due to its non-unique character the principle of pacta sunt servanda can be found in every agreement, the parties of which shall act to conclude the agreement under the intention to abide through its clauses (I. I. Lukashuk, ‘The Principle Pacta Sunt Servanda and the Nature of Obligation Under International Law’ (1989) 83 The American Journal of International Law 3 513 <www.jstor.org/stable/2203309> accessed 27 October 2020).

[6] Saul and others (n 11); It is brought to light by the test that the incident had to be unforeseeable by a reasonable person in the circumstances in which it was made and at the time of contract.

[7] Temporary impossibility may qualify as force majeure only in the case where the moment of the performance was deemed of essence to the contract (M Katsivela, ‘Contracts: Force Majeure Concept or Force Majeure Clauses’ (2007) 12 Uniform Law Review 101).

[8] C Brunner, Force Majeure And Hardship Under General Contract Principles (Kluwer Law International 2009) p.75; E McKendrick, Force Majeure And Frustration of Contract (Second edn, Routledge 2013) p.8.

[9] ‘Eastern Interconnection Planning Collaborative Analysis Team Agreement’ Law Insider Official Web Page, <https://www.lawinsider.com/contracts/48ilXverPFQ> accessed 11 November 2020.

[10] Karsales (Harrow) Ltd. v Wallis [1956] 1 W.L.R. 936.

[11] S Shepherd and R Shour, ‘Force Majeure Clause: Their Role in Sale Contracts’, Ince & Co International Law Firm Report (August 2011) <https://www.mondaq.com/uk/contracts-and-commercial-law/142006/force-majeure-clauses-their-role-in-sale-contracts> accessed 11 November 2020.

[12] Ibid 2.

[13] For example, “In the event that a Force majeure condition prevails for a period of 75 consecutive days then Company may terminate the Agreement forthwith by giving notice, without being obliged to pay any compensation to Contractor.”

[14] Brunner (n 15) 383.

[15] In England and the United States impossibility and impracticability are associated with the doctrine of frustration (Katsivela (n 14)).

[16] Lebeaupin v Richard Crispin & Co [1920] 2 K.B. 714.

[17] D McNair, ‘Force Majeure Clauses’ [2011] Asia Pasific Projects Update <https://www.dlapiper.com /~/media/files/insights/publications/2012/06/iforce-majeurei-clauses/files/forcemajeureclauses/fileattachment /forcemajeure clauses.pdf> accessed 13 November 2020.

[18] Fyffes Group Ltd v Reefer Express Lines Pty Ltd, [1996] 2 Lloyd’s Rep. 171 196 (QBD).

[19] McKendrick (n 15) p.8.

[20] McNair (n 24).

[21] A Guden and D Girinti, ‘Contract Performance During the Covid-19 Outbreak: Can Coronavirus Trigger Frustration or Force Majeure Under English Law?’, Guden International Law Firm <https://guden.av.tr/contractual-performances-coronavirus-frustration-force-majeure-english-law> accessed 01 December 2020.

[22] R Stone and J Devenney, The Modern Law of Contract (11^th edn, Routledge 2015) p.420.

[23] F.A. Tamplin S.S. Co.Ltd. v Anglo-Mexican Petroleum Products Co. Ltd. [1916] 2 A.C. 397.

[24] Paradine (n 8).

[25] “When the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract.” (McKendrick (n 15)).

[26] Taylor (n 6) 833-34.

[27] The ending of a charter party due to the mishap had found a commercial frustration of the adventure by delay in Jackson v Union Marine Insurance Co (1874) L.R.10 C.P. 125.

[28] Law Reform (Frustrated Contracts) Act 1943, s 1(1).

[29] McKendrick (n 15).

[30] Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221.

[31] Hirji Mulji v Cheong Yue Steamship Co. Ltd. [1926] A.C. 497; National Carriers Ltd v Panalpina Ltd [1981] AC 675.

[32] National Carriers Ltd (n 38).

[33] Stone and Devenney (n 29) 421.

[34] Taylor (n 6).

[35] Davis Contractors Ltd v Fareham UDC [1956] AC 696.

[36] Jackson (n 34).

[37] Hirji Mulji (n 38), 510.

[38] Tamplin Steamship (n 30).

[39] Ibid.