Force Majeure and Frustration: The Impact of Covid-19
Key Contact: Jared Ursell
Author: Joe Smith
The impact of Covid-19 has had a significant impact not only on businesses themselves, but their ability to perform certain contracts, especially as different lockdown regimes have been introduced across different parts of the UK. Disputes can arise as a result; for example, where one party intends to bring the contract to an end as a result of the other being unable to perform the contract, or perhaps where a party claims that the other has committed a breach of the contract for failing to carry out their contractual obligations. With further national lockdowns underway, two separate legal concepts have received increased attention: force majeure clauses and frustration.
The first step is to review the terms of the contract to assess whether there is a force majeure clause in effect. This clause outlines what is to happen to the contract and the parties’ respective obligations under the contract in the event of a certain unforeseen and extraordinary event occurring. The typical purpose of this clause is to excuse or suspend one or both parties from the performance of their obligations under the contract.
This often includes (but is not limited to) events such as natural disasters, epidemics or pandemics, terrorist attacks or war, sonic booms or other similar events that the parties negotiate into the contract.
If a party wants to rely on a force majeure clause, the burden of proof will be on them to show that a force majeure event has occurred: i.e. the relevant facts give rise to the clause coming into effect. It must also be shown that the party (or parties) are unable to perform the contract due to events outside their control and for which they do not accept responsibility. The final point to note is that there must not have been any other reasonable steps that parties could have taken to mitigate or avoid the consequences of the event.
In respect of Covid-19, force majeure clauses will often include epidemics or pandemics, although the precise wording of the clause will need to be reviewed. Even if the pandemic itself may have been foreseeable (depending on when the contract was entered into), the wide-ranging restrictions implemented by the UK Government may not have been. However, whether Covid-19 will be encapsulated by the force majeure clause will largely depend on the wording of that specific clause and the overall effect that the lockdown restrictions have had on the parties.
Frustration of the contract
If there are no force majeure clauses in the contract, it is then worth considering the legal doctrine of frustration. This becomes relevant when the following occurs: –
- an unforeseen event occurs after the commencement of the contract that causes it to be physically, commercially or legally impossible for parties to carry on with it;
- neither party is at fault or is responsible for the event occurring;
- the performance requirements of the parties under the contract are completely transformed as a result of the event occurring; and
- the occurrence of the event is so significant that it is seen as ‘striking the root’ of the contract and the purpose is entirely different to what was initially intended.
As illustrated above, it is not enough that an event has caused merely an inconvenience or has proved costly, it must cause fundamental faults with performance of the parties’ obligations under the contract. If there is an alternative way of performing the contract, that is not considered too remote from the parties’ initial contemplations, then the contract is not likely to be frustrated.
A contract cannot be frustrated where a force majeure clause is in effect; they are two separate legal concepts and do not both apply together. Frustration cannot occur where the event was foreseeable by the parties or where the contract was entered into after or during the event.
Where frustration of a contract has occurred, the contract is in effect terminated and parties are discharged from their obligations under the contract. Money paid before the frustrating event can be recovered, in addition to all unpaid money due before the frustrating event being no longer due. A party who has incurred expense may be able to retain an amount to account for this expense. The Court also has the power to request a party to pay a just sum of money where they have received a benefit from the contract, prior to the contract being frustrated.
Whether a contract can be frustrated as a result of the impact of Covid-19 will depend on the effect it has had on the parties involved. If, for example, the parties have faced higher costs under the contract or had alternative means to perform their obligations, this will not be enough. The bottom line is that Covid-19 must be shown to have gone to the heart of the contract, in a way that makes the contract impossible or illegal to perform or completely different to what they intended at the outset.
Both force majeure clauses and the doctrine of frustration are legal tools that may be helpful to businesses whose contracts have been significantly impacted or disrupted as a result of Covid-19. These are very subjective legal concepts, and whether redress will be available depends on the wording of the contract and also the impact the pandemic has had on the parties’ ability to perform the contract.
Please do not hesitate to get in touch with the dispute resolution team at Acuity Law if you would like support or assistance.