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Force majeure and frustrated contracts - guide for contractors

Contractors may find that the legal principle of frustration, and contract clauses under the heading of ‘force majeure’, could in some circumstances provide them with relief in the event of a contract becoming difficult or impossible to fulfil.

“Frustration can apply in limited circumstances where the lawful performance of a contract by a contractor becomes not just more difficult, but impossible, as a result of an event after formation of the contract, and not due to the fault of either party,” explains Roger Sinclair of contractor legal specialist Egos. “It may also apply where performance would be radically different from that contemplated by the parties at the time of formation.

“Force majeure is a term not having a specific meaning under English law, but it is often used as a descriptive contractual heading, for clauses that set out provisions intended to apply when events that might interfere with or prevent the performance of a contract occur, outside the reasonable control of the parties. So, force majeure provisions may often have a broader effect than would be the case by applying the principle of frustration.”

How the English legal principle of frustration works

According to Sinclair, the principle of ‘frustration’ seems to have developed as a by-product of the way in which English common law will, in a limited number of specific circumstances, imply terms into a contract.

“Such circumstances may be if it is necessary for the term to be there for the contract to actually work, or if it is obvious to the objective observer that the term should be there, even though it is not expressly stated. A term will not be implied simply because one party suggests it might be a good idea – the provision to be implied has to be either necessary or obvious.”

The concept of frustration can only be applied in similar limited circumstances. Sinclair continues: “These are where the lawful performance of a contract becomes impossible, or at least radically different from that envisaged at the outset. It will not be enough that performance simply becomes more difficult or more expensive; and it must be as a result of an event that is not the fault of the person trying to take advantage of frustration.”

Frustration offers limited relief from the contract

When there is a frustrating event, then the contract will be automatically discharged. In other words, both parties are released from the contract and any further obligation to perform their obligations under it.

“Any losses lie where they fall and each party is released from all contractual obligations, including any obligations to pay,” notes Sinclair. “There are some provisions, introduced by an Act in 1943, which allow for any money paid to be reclaimed, subject to deduction for expenses reasonably incurred prior to the frustrating event.”

However, he warns that because of the limited circumstances in which frustration can be applied, contractors should not rely on frustration to get themselves out of a hole.

Force majeure is not actually a recognised English legal term

“English law does not recognise force majeure as a principle in its own right,” says Sinclair. “The expression, as I understand it, comes from the Napoleonic Code that forms the basis of French civil law, and not from the much older Norman-French laws that seem to have formed the basis of English common law.

“It is a term used descriptively to summarise the kind of express provisions in a contract that cover what happens if an event such as an act of war or hurricane occurs – things that have in common that they may, independently of the parties, interfere with or prevent the performance of the contract. So, such provisions may cover a broader range of issues than would be covered by frustration alone.”

Force majeure is used in most contractor contracts

Force majeure clauses will appear in many contracts, including those entered into by contractors. Sinclair explains: “Force majeure terms are used to try and be more explicit in laying down a framework in advance to govern what would happen if an external event were to interfere with or prevent the performance of a contract.

“Typically, but not invariably, the force majeure provision may suspend performance for the period during which the external event is causing such interference or prevention. Such a term may often allow either party to terminate the contract after this initial period, if the external event is still continuing.”

Typically, but not invariably, the force majeure provision may suspend performance for the period during which the external event is causing such interference or prevention

Roger Sinclair, Egos

The term may also provide a framework for how any outstanding issues, including payments, would be dealt with during such a period of suspension, and/or in the event of contract termination under the term.

A typical example of a simple force majeure clause used in contractor contracts is as follows:

Force majeure: If a party is obstructed in performing any of its obligations by an event outside its reasonable control, then performance to the extent obstructed is suspended for so long as the obstruction continues. Whilst performance has been suspended for more than 7 days, either party may terminate the Contract by immediate written notice.

How frustration and force majeure work in practice

In order to determine whether a contract can be frustrated, or its force majeure clauses apply, the key aspect is to understand the specific circumstances and to know precisely what is in the contract. Sinclair provides the following examples to illustrate frustration and force majeure in practice:

Example 1: An IT contractor is involved in a car accident that is not their fault, forcing them to take time out of contract, after which they can return to work.

  • If the contract is for personal service by a contractor who is medically incapable of working, then the contract could be discharged for frustration
  • But if the contractor was off work for only two days of a six-month contract, this would generally not be seen as something that might make the contract impossible to perform. However, three months might, resulting in frustration
  • Is the contract a contract for services that someone other than the contractor could perform? If so, the contract is not frustrated, it has just become more difficult because the contractor has to find a substitute in order to perform
  • A force majeure clause may specify what happens in the event of the contractor being unable to perform as a result of events outside their reasonable control.

If the accident was the contractor’s fault, and the client could prove this, then the outcome could be different. But it would be the other party to the contract that would have to prove the contractor’s negligence and prevent a discharge by frustration.

Ultimately, it would be a case of whether the court considered that a road accident caused by negligence of the contractor amounted to due to the fault of the contactor (frustration) or as being outside the contractor’s reasonable control (assuming a force majeure provision such as that above).

Example 2: An oil and gas contractor has a contract to work on a remote overseas oil installation. The client’s installation is destroyed by terrorist action.

  • This may be covered both by frustration, and by an express force majeure provision. If there’s no longer an oil installation, then performance is impossible, so the contract would be discharged for frustration
  • A force majeure clause that might specify the consequences in the event of such an eventuality.

If the installation was destroyed as a result of the client’s negligence, and the contractor wanted to suggest that the contract was not discharged as a result of frustration, and that the client was therefore in breach of contract, then the contractor would have to prove fault on the part of the client in the events leading to the destruction of the installation.

Example 3: An engineering contractor has a contract to build a slurry pipeline from a mine in-country to the coast of a West African state. There is a military coup, and the Foreign Office advises against going to the region, so the contractor does not travel.

  • Foreign Office advice is not of itself something that makes performance impossible. Likewise, it does not make performance unlawful. But it might be argued that it renders performance radically different from that envisaged at the time of formation. So, arguably, the contract could be discharged by frustration
  • There may be a force majeure contract in place that covers just this eventuality, as this is a circumstance in which a properly drafted force majeure clause could make a difference.

Sinclair concludes: “Frustration does not actually occur much in practice. In its place are force majeure provisions, which represent attempts to contractually modify the principle of frustration, and to protect both parties to the contract.”

Published: 10 December 2013

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