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In the Days of COVID-19: Overview of Force Majeure and Frustration of Contract in English Law

Ulaş Devrim Ünal Ulaş Devrim Ünal/ Tecnicas Reunidas
18 May, 2020

The world is experiencing extra-ordinary days due to the Covid-19 pandemic. The construction sector is highly globalized with the involvement of many vendors, contractors, subcontractors, designers, etc. from different regions of the world and this means continuous mobilization of engineers, supervisors, technicians, specialists, workers, equipment, materials, machinery, etc. Almost all of the construction projects are affected by the restrictions brought by the countries due to the Covid-19 pandemic. All the companies involved in current construction projects try to understand how to act in order to protect their benefits, and the main contractual concepts which have been/are being reviewed, discussed, searched is force majeure.

English law is the one selected by many companies as governing law of the contract in many international construction projects. This article aims at providing an overall overview on how English law operates in this sense.

Force majeure clauses can be regarded as “gatekeeper” of contractual terms. Properly drafted, they set the boundaries within which a party to a contract is obliged to perform and define the circumstances which will excuse non-performance.[1] 

Albeit force majeure clauses are very common in commercial contracts, the term “force majeure” originates from French Law and it is not recognized as having a precise meaning in English Law. This lack of definition was firstly underlined in Matsoukis v Prietsman & Co.[2]  concerning a shipbuilding contract including liquidated damages clause stating “force majeure excepted”. A Belgian lawyer provided an opinion of its use in Continent Europe as ‘causes you cannot prevent or avoid which you are not responsible’, Bailache J opined that this interpretation was very wide and stated:

“I am quite satisfied that I ought to give them a more extensive meaning that ‘act of God’ or ‘vis major’. This difficulty is to say how much more extensive.”[3]

English law employs the doctrine of frustration which is said to be analogous (although not identical) to force majeure.[4]   It is said that there is a hard and thin line between force majeure and the doctrine of frustration since both deal with the discharge of obligations in case of a supervening event.

Frustration is the legal term for a doctrine whereby in certain circumstances a contract is held no longer binding on the parties, and they are released from further performance.[5]  The expression “frustration of contract” refers to the whole doctrine of discharge by supervening events, irrespective of the type of event which brings about discharge.[6]  

English law has evolved by accepting the contracts as a rule book. The courts must respect what is included in the contract and are not allowed to fill in the gaps which is known as pacta sund servanda or sanctity of contract.  It takes the position that, once those risks have been so allocated by the parties, they should, as a general rule, not be re-allocated in a different manner by the courts.[7]  Arden J’s below statement in the recent case of Full Metal Jacket Ltd v Gowlain Building Group Ltd.[8]  exemplifies this formalistic approach;

“The courts must keep the principles applying to the interpretation of contract up-to-date like any other branch of law. It may be that in the future the law will develop so that evidence such as subsequent conduct is admissible in the interpretation of certain types of contract, or that certain types of subsequent conduct are admissible in interpretation. However, courts have not taken that step.”

Therefore, unless an express provision is provided in the contract regarding the occurrence of the supervening event, literally lack of force majeure clause, the only available doctrine is the doctrine of frustration. In British Movietonews Ltd. v London & District Cinemas Ltd.[9], Denning LJ’s attempt in the Court of Appeal to introduce a principle giving the power to court to display the parties’ obligation under the contract and do what is just and reasonable where there had been ‘an uncontemplated turn of events’ falling short of frustration, was rejected.

It is now widely accepted that the definitive juridical basis for the doctrine is found in the speeches of Lord Radcliffe in the case of Davis Contractors Ltd v Fareham Urban District Council[10]:

“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. Non haec foedera veni. It was not this that I promised to do.”

The case was concerning the construction of houses completed in twenty-two months instead of eight months and with a higher cost due to unavailability of labours. Davis claimed that the contract was frustrated and therefore must be paid a reasonable sum on quantum meruit basis. However, Radcliff LJ rejected this claim stating that the shortage of labour was not sufficient to frustrate the contract.  He defined limits of doctrine roughly: 

  • There should be no default of either party to contract
  • Contractual obligation shall become incapable of being performed
  • Circumstances shall render the performance radically different from what was undertaken.

However, this case did not clearly define the limits of the doctrine, but at least provided a rough base for development of doctrine. It shall be noted that the first two limits he draw are commonly used in the force majeure clauses as well.

Recently, Bingham LJ attempted to draw more advanced framework of doctrine of frustration in J. Lauritzen A.S. v Wijsmuller B.V. (The Super Servant Two)[11]  by consolidating the propositions in previous cases:

Certain propositions, established by the highest authority, are not open to question:

  1. The doctrine of frustration was evolved to mitigate the rigour of the common law's insistence on literal performance of absolute promises (Hirji Mulji v Cheong Yue Steamship Co. Ltd[12], Denny Mott & Dickson Ltd v James B. Fraser & Co. Ltd[13], Joseph Constantine Steamship Line Ltd v Imperial Smelting Corporation Ltd[14]). The object of the doctrine was to give effect to the demands of justice, to achieve a just and reasonable 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.
  2. Since the effect of frustration is to kill the contract and discharge the parties from further liability under it, the doctrine is not to be lightly invoked, must be kept within very narrow limits and ought not to be extended (Bank Line Ltd v Arthur Capel & Co.[15], Davis Contractors Ltd, Pioneer Shipping Ltd v B.T.P. Tioxide Ltd[16]).
  3. Frustration brings the contract to an end forthwith, without more and automatically (Hirji Mulji, Maritime National Fish Ltd v Ocean Trawlers Ltd[17], Joseph Constantine Steamship Line Ltd, Denny Mott & Dickson Ltd).
  4. The essence of frustration is that it should not be due to the act or election of the party seeking to rely on it (Hirji Mulji, Maritime National Fish Ltd, Joseph Constantine Steamship Ltd., Denny Mott & Dickson Ltd, Davis Contractors Ltd). A frustrating event must be some outside event or extraneous change of situation (Paal Wilson & Co. A/S v Partenreederi Hannah Blumenthal[18]).
  5. A frustrating event must take place without blame or fault on the side of the party seeking to rely on it (Bank Line Ltd, Joseph Constantine Steamship Ltd, Davis Contractors Ltd, The Hannah Blumenthal) “

In doctrine of frustration, the event must be beyond the control of the parties; it should not be the result of parties’ negligence and no party should benefit from it. These propositions reflect a commonly accepted essence of doctrine which is known as ‘self-induced frustration’.[19]

Obviously it is impossible to formulate an exhaustive list of possible frustrating events, but the ones recognized by the courts as capable of amounting to frustrating events provide a general frame. The formula, as given in Davis Contractors Ltd v Fareham Urban District Council[20], is that the performance must be rendered impossible by a supervening event which is not due to fault of a party or the contract can only be performed in a way that is substantially different from what was originally set out in the contract.

It shall be noted that English law is clear that economic impracticability does not discharge the obligations under contract. In Davis Contractors Ltd v Fareham Urban District Council [21] Viscount Simonds J states ‘it by no means follows that disappointed expectations lead to frustrated contracts’. Similarly in National Carriers Ltd v Panalpina (Northern) Ltd[22] where appellants had been prevented from using the warehouse they had leased due to closed access by local authority as a result of dangerous condition of derelict Victorian warehouse opposite to that demised to the defendants, Simon LJ stated that ‘the appellants were undoubtedly put to considerable expense and inconvenience. But that is not enough[23].

In a recent case of Gold Group Properties Ltd v BDW Trading Ltd[24] economic recession in 2008 was not classified as frustration. Coulson J stated that ‘there was in truth no supervening event at all. This was not a case where the subject matter of the contract exploded or was lost, or some other event occurred which could not possible have been envisaged by contract… it cannot be argued that the receipt of gloomy forecast two years before the properties came onto the market was ‘an event’ in the proper sense of the word[25]’.

The closure of Suez Canal was not held as frustrating event since the goods in question could be supplied via the Cape of Good Hope in Palmco Shipping Co. v Continental Ore Corp.[26] This case also shows that existence of alternative method of performance removes the impossibility and the doctrine cannot be invoked.

For the sake of clarity and with the aim of providing some guidelines, some events that may frustrate the contract can be listed as below.

1. Destruction of subject matter:

The performance may become impossible due to destruction of the subject matter, then the contract is discharged. The delicate question arising out here is what ‘the subject matter of contract’ is. It is defined as ‘the thing essential for the performance of the contract’. It can be anything essentially required for the performance. It can be anything essentially required for the performance; a specific ship for carriage, a concert hall, a factory etc.

2. Temporary unavailability or delay:

Another reason of impossibility may be temporary unavailability or delay. Not all delays are accepted to discharge the contract, the performance must become ‘radically different’ due to delay. In Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd[27], Rix LJ underlines the importance of the test of being ‘radically different’:

“It tells us that the doctrine is not to be lightly invoked; that 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 contracts as provided for and contemplated and its performance in the new circumstances.”

3. Frustration of purpose:

In some cases, the courts held that the contract was discharged when the purpose of contract was frustrated. In famous coronation case of Krell v Henry[28], the defendant agreed to hire some rooms from the plaintiff to watch the coronation procession of Edward VII which then was cancelled due to illness of the King. The Court of Appeal held that the contract was frustrated.

4. Supervening illegality:

A contract can be discharged if the performance becomes illegal after its formation. This is another type of impossibility that may arise from the changes in the law or in the legality of the acts of parties to contract. For instance, a legal change forbidding the performance undertaken in the contract can frustrate the contract such as wartime regulations forbidding the trade of timber[29].

After listing some possible frustrating events, it is worth to see what could be the consequences of frustration. As stated above, the discharge is automatic so that the contract becomes ineffective once the frustrating event occurs, irrespective of the wishes of the parties. Partial frustration is not also recognized in English law as held in Howell v Coupland[30].

Another aspect important to analyse is the question of what happens to parties’ financial obligations when the contract is frustrated. In each type of contract, different payment regimes apply. For example in construction contracts, milestone payments and progress payments are common. Usually, an advance payment is also granted by the client to support the contractor to finance the mobilization usually subject to deduction proportionally from each interim certificate. Therefore, the cost of the work done is not exactly in line with the payments although it is aimed so.

In 1943 English Parliament enacted The Law Reform (Frustrated Contracts) Act 1943 based on which the judges can allow the recovery of all expenses incurred before the contract is frustrated. The provisions of the Act may be excluded by the contract. If there is no express provision excluding the operation of the Act, it remains applicable.

As seen above, doctrine of frustration of contract is very strict and when it operates it leaves the parties to the contract with very harsh consequences. This situation forces the parties to include express provisions into their contracts which are usually called “force majeure clauses”.

[1] Kratochvilova, Emma, “Force majeure clauses”, Construction law journal, 2012

[2] (1915) 1 K.B. 681 KBD.

[3] Matsoukis (n 4) 685

[4] Smith Jenifer & Behrman, Andrew, “The importance of a strong force majeure clause in an unstable geopolitical environment” (2015), Journal of World Energy Law and Business, Vol. 8, No. 2

[5] Wallace, Ian Duncan, Hudson’s Building and Engineering Contracts, 11th Edition, Sweet & Maxwell, London, 1995 pp. 633

[6] Treitel, Sir Guenter, Frustration and Force Majeure, 2nd edition, Sweet & Maxwell, London, 2004,  pp. 66

[7] Treitel, Sir Guenter, Frustration and Force Majeure, 2nd edition, Sweet & Maxwell, London, 2004, pp. 1

[8] (2005) EWCA Civ 1809

[9] (1952) A.C. 166

[10] (1956) A.C. 696

[11] (1990) 1 Lloyd’s Rep. 1.

[12] [1926] A.C.497

[13] [1944] A.C.265

[14] [1942] A.C.154

[15] [1919] A.C.435

[16] [1982] A.C.724

[17] [1935] A.C.524

[18] [1983] 1 A.C.854

[19] This article will not bring a broad discussion on the doctrine of “self-induced frustration”. Below statement of Sumner LJ in Bank Line Ltd v Arthur Capel & Co (1919) AC 435, 452 provides some clue: “It is now well settled that the principle of frustration of an adventure assumes that frustration arises without blame or fault on either side. Reliance cannot be placed on a self-induced frustration; indeed, such conduct might give the other party the option to treat the contract as repudiated.”

[20] (1956) A.C. 696

[21] (1956) A.C. 696

[22] (1981) AC 675

[23] (1981) AC 675

[24] (2010) BLR 235

[25] Gold Group Properties Ltd (n 47) 235

[26] (1970) 2 Lloyd’s Rep. 21

[27] (2007) EWCA Civ 547

[28] (1903) 2 KB 740

[29] Denny, Mott & Dickson Ltd v James B Fraser & Company Ltd (1944) AC 265

[30] (1874) L.R. 9 Q.B. 462

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