FREE CHAPTER from ‘Covid-19, Force Majeure and Frustration of Contracts – The Essential Guide’ by Keith Markham

CHAPTER ONE – INTRODUCTION

I had been expecting the e-mail but, when it came, I was a little surprised by the content which said something like:

Why can’t you understand that the government’s order banning events is obviously force majeure. The courts will definitely agree with me so why can’t you!’

After allowing myself five minutes to take stock, I wrote back, pointing out some of the basic rules on force majeure clauses, and we managed to reach agreement as to a way forward.

In many ways, that e-mail encapsulates the dilemmas faced by many lawyers and their clients in dealing with problems caused by Covid-19. What does the clause actually say? should they insist on relying on that clause or should they adopt a more flexible approach?

The aim of this book is to provide a simple overview of the rules relating to force majeure and frustration and to consider what alternative approaches may be available. Particular emphasis will be placed on the applicability of these rules in the context of Covid-19.


1.1 Force majeure v frustration

There is no general principle of force majeure that applies to English contract law. However, it is open to the parties to any contract to insert such a clause which has the effect of excusing one of the parties from the performance of its obligations under the contract for a specific period of time. Only if that party is unable to resume performance, within a certain period of time, will the other party have the right to bring the contract to an end.

In the absence of such an express provision for the event that occurs, either party may rely on the doctrine of frustration. Frustration is said to occur:

“… whenever the law recognises 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. Non haec in foedera veni. It was not this that I promised to do.”1

If such a frustrating event were to occur, then further performance of the contract is rendered impossible and it is discharged with immediate effect. Unsurprisingly, the courts are reluctant to invoke such a doctrine lightly as will be discussed in more detail in chapter 7.


1.2 Key drafting considerations

When drafting a force majeure clause there are a number of key considerations that should be borne in mind:

  • if you wish to rely on force majeure to excuse failure to perform under a contract there must be a clause dealing with this issue in the contract

  • even if the contract does contain a force majeure clause then sometimes it may cover the event complained of and sometimes not – care should be taken as to what events are included or excluded

  • a force majeure clause may contain a series of obligations that must be satisfied before it can be relied upon – this may include a requirement to notify the other party of any relevant force majeure event within a specified timeframe

  • even if the force majeure clause does cover the force majeure event, there is still a general requirement to mitigate the effect of that event

All of these issues will be dealt with in more detail in later chapters, but it is important to note at the outset that when drafting a clause each party to the contract will have competing concerns which can be summarised as follows:

Customer (party assumed to have fewer obligations under the contract)

Supplier (party assumed to have more obligations under the contract)

Narrow definition of force majeure event

Broad definition of force majeure event

Exhaustive wording – specific list only

Non-exhaustive wording – ‘including but not limited to …’

Narrow definition of impact – ‘prevention’

Broad definition of impact – ‘hinder, delay, prevent’

Formal notification required within a narrow timeframe

No formal notification requirement

Prevention requirement – ‘could not have reasonably prevented …’

No prevention requirement

Mitigation requirement on
Supplier

Minimal mitigation requirement

Requirement to resume performance as soon as reasonably practicable whether the force majeure event has ended or not

Limited requirement to resume performance – only when force majeure event has come to an end

Avoid reciprocal provision if
possible

Reciprocal provision requiring Customer to mitigate effects as well

Only Customer can terminate

Either party to have the right to terminate

Short period of time before acquiring the right to terminate

Long period of time before acquiring the right to terminate


1.3 Relying on a force majeure clause

A contracting party will be able to rely on a force majeure clause to be excused from its obligations where it can establish the following:

  • that the contract contains a force majeure clause that refers to the relevant event

  • that the relevant event has occurred

  • that the relevant event is the sole effective cause of the party’s inability to perform its obligations

  • that the relevant event was neither foreseeable nor preventable

  • that the affected party took reasonable steps to mitigate the effect of the relevant event

  • that the affected party notified the other contracting party of the relevant event in accordance with any specific notification requirements

If all these requirements can be satisfied, and performance cannot be resumed before the expiry of the time period specified in the force majeure clause, then the affected party may be entitled to terminate the contract.

All of these issues will be discussed in more detail in the following chapters.


1.4 Covid-19

I think that it is fair to say that many force majeure clauses are inserted into contracts without a great deal of thought. Some thought may have been directed to acts of God and government but specific references to epidemics and pandemics remain rare apart from in certain sectors. Then along came Covid-19 and suddenly these clauses were dusted down and every nuance of meaning was pored over hopefully (desperately?) in minute detail.

In this book I will examine how these clauses work and will go through the key issues referred to above. The main emphasis will be on Covid-19 but consideration will also be given to other potential force majeure events where appropriate.


1.5 Guidance

There are two documents that have now been published which may be of assistance:

Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency

This document has been produced by the cabinet office. Published on the 7th May 2020, it sets out a series of suggestions in respect of ‘responsible contractual behaviour’ and can be accessed here:

https://www.gov.uk/government/publications/guidance-on-responsible-contractual-behaviour-in-the-performance-and-enforcement-of-contracts-impacted-by-the-covid-19-emergency

This document and its contents will be discussed in more detail in chapter 8.

Covid-19 – pandemic, consumer contracts, cancellation and refunds

This document was published by the Competition and Markets Authority (‘CMA’) on the 30th April 2020 and provides focussed, Covid-19 related guidance on issues such as cancellation and refunds in the context of Trader to Consumer contracts. It can be accessed here:

https://www.gov.uk/government/publications/cma-to-investigate-concerns-about-cancellation-policies-during-the-coronavirus-covid-19-pandemic/the-coronavirus-covid-19-pandemic-consumer-contracts-cancellation-and-refunds

This document and its contents will be discussed in more detail in chapter 6.

1.6 Trader to Consumer Contracts

One of the most controversial aspects as to how the Covid-19 outbreak has unfolded in the UK has been the extent to which a considerable number of traders have sought to rely on Covid-19 to cancel contracts with consumers, and refuse to provide refunds or to return deposits.

The CMA established a task force in respect of Covid-19 related matters on 20th March 2020 and produced the aforementioned guidance note shortly thereafter. As will be seen in chapter 6, the CMA’s view is that traders should be providing refunds to consumers in almost all cases and it has already begun a formal investigation into those sectors where the worst abuses have taken place.


1.7 Summary

In summary, the Covid-19 outbreak has already had a profound impact on both our society and our economy. Its precise impact on our contracts remains to be seen, but in the meantime it is essential for all lawyers and their clients to familiarise themselves afresh with their force majeure clauses and consider how they can be used as either a shield or a sword.

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1Davis Contractors Ltd v. Fareham UDC, Lord Radcliffe [1956] 1 AC 696 at 729.