This article is written by Mayank Thakral, School of Law, Devi Ahilya Vishwavidyalaya, Indore, B.A.LLB. (3rd Year) during his internship at LeDroit India.
Abstract –
Force majeure and frustration of contract are two of the most important doctrines in contract law, which have been designed to address unforeseen events that disrupt the performance of contractual obligations. This article explores the theoretical foundations, legal principles, and practical implications of these doctrines. It examines their historical evolution, distinguishes between their applications, and discusses their relevance in contemporary commercial transactions, particularly in the context of global crises such as pandemics, wars, and climate-related disasters.
Introduction –
Contractual agreements are the cornerstones of commercial and legal relationships, as well as mutual commitments between parties. However, unpredictable real-world events can test such commitments, meaning that the law has to be flexible enough to provide for the unforeseen. Two key mechanisms by which this can be done are force majeure and frustration of contract.
Frustration is where an event occurs after the formation of the contract which makes it physically, legally or commercially impossible to fulfill the contract, or transforms that obligation to perform into something radically different than what was originally planned which makes it unjust to enforce. If frustration is successfully proved, the contract will come to an end and the parties will be released from all future obligations .
Force majeure is a form of contractual clause that will discharge one or more parties from the obligation to perform their obligations under a contract if certain event arises, known as the “supervening event”. Examples include war, riots and hurricanes or such other events outside the parties’ control. The reason this kind of clause exists is because it helps parties navigate what obligations they may still owe if the unexpected occurs. It does not apply a general rule of force majeure in English law.
Definition and Scope of Force Majeure –
Historical Origins –
Force majeure originated from French civil law, and it translates to “superior force.” It is usually developed historically to cover circumstances beyond human control, such as natural catastrophes or wars that make it impossible for parties to perform their part of the contract.
Force Majeure Provisions in Contracts –
Force majeure clauses are arrangements in contracts that define the conditions according to which parties are relieved from performing their obligations. These terms are customized to the needs of the parties and often include:
*Acts of God, such as earthquakes and floods.
*Acts of government, such as new regulations and embargoes.
*Civil disturbances such as strikes and riots
*Global crises, such as a pandemic .
Relationship with force majeure –
If a contract includes a force majeure clause, the parties are likely to be unable to claim frustration in regard to the specified event, as the doctrine applies only narrowly. Thus, from the inception, it will be assumed that the parties intend that any effects that might arise from a supervening disaster will have been expressly dealt with in the contract itself. The court, as a starting point, will look to the contract to determine whether the parties have anticipated the situation that has come to pass.
Since payment will almost always be considered here, however, the courts would want to be satisfied that the force majeure clause was fully and completely in regard to the event before concluding that the doctrine of frustration was not relevant . In short, if the complete provision is made in respect of that situation which has occurred, the parties cannot call upon frustration.
Legal Standards for Force Majeure –
For a force majeure clause to be activated, the following conditions usually must be met:
- The happening must be outside the control of the parties.
- The happening must make it impossible, impracticable, or impossible for the party to perform the contract.
- The happening must not be foreseeable at the time of contracting .
Frustration of Contract: Doctrine and Application –
Historical Development – The doctrine of frustration was derived from the common law. It evolved as a reaction to stringent principles of contract. It achieved a place in the annals of jurisprudence after the landmark case of Taylor v. Caldwell,1863 wherein a music hall burnt down, and consequently, the parties were exonerated from performance, since the contract became impossible to perform.
Legal Framework –
Frustration arises if the occurrence of an unforeseen supervening event fundamentally alters the character of a contractual obligation so that : it becomes impossible to perform it, or illegal to perform it or radically different from what the parties contemplated.
Key Characteristics –
Unlike force majeure, frustration operates in the absence of specific contractual clauses and relies on judicial interpretation. The threshold for frustration is high, requiring a significant and unforeseeable event that alters the foundation of the contract.
Global Perspectives –
• Common Law Jurisdictions –
In jurisdictions like the UK, the US, and Australia, frustration is a well-established doctrine. Force majeure clauses are treated as a matter of contractual freedom, with courts emphasizing the need for precise drafting.
• Civil Law Jurisdictions –
Civil law systems, like France and Germany, have force majeure as part of the statutory framework, with default rules in place for unexpected events.
• International Instruments –
The UN Convention on Contracts for the International Sale of Goods (CISG) accepts force majeure but let’s its application depend on party agreement.
Practical Applications and Case Studies –
• COVID-19 Pandemic –
Many commercial contracts in a wide variety of sectors and industries are selected by the parties to be governed by English law. In the current COVID-19 (coronavirus) pandemic, there has been much discussion of parties being released from performance as a result of “force majeure.”
The pandemic was a test of resilience of contracts around the world. Courts assessed the force majeure claims depending on whether the wordings carried terms such as “pandemic” or “government-imposed lockdowns.” In ‘Dwyer v. The London Borough of Islington’ (2021), the law rejected the argument of frustration considering that the events were foreseeable; disruption cannot be regarded as unforeseeable.
The 2020 pandemic threw open new litigations concerning force majeure clauses. In Virginia, for instance, Regal Cinemas theaters shut down during the pandemic. United States District Court for the Western District of Virginia in a case where the defendant’s performance under its contract is claimed to be excused, the force majeure clause in the lease executed between the parties applied only if “the Complex or other improvements on the Property , or any part thereof, are damaged or destroyed by fire, flood, natural causes, or other casualties.
• Airline industry –
In Salam Air SAOC v. Latam Airlines Groups SA [2020] EWHC 2414 , the claimant claimed an injunction to prevent the respondent from making claims about underlying leases of three aircraft on grounds that the contract was frustrated under regulation which emanated from Public Authority of Civil Aviation in Oman causing a significant loss of flying demand. The court held that, although this made the travel industry challenging, it was not enough to form a basis for frustration since it did not even bar either party from performing their contractual obligation.
• Commercial property –
In Bank of New York Mellon (International) Ltd v. Cine-UK Ltd [2021] EWHC 1013 , the tenants argued that the temporary frustration of their commercial lease occurred because they had been forced to close up as a result of the governmental legislation stemming from the COVID-19 pandemic. Their argument was thus unsuccessful since an 18-month forced closure in the context of a 15-year lease would not make the contract impossible to perform or radically different from what was originally planned. The Master clarified that there was no such thing as temporary frustration.
Challenges and Criticisms –
Challenges of Force Majeure and Frustration of Contract.
Force majeure and frustration of contract are doctrines that are intended to deal with unexpected events that disrupt the performance of a contract. However, both face challenges due to vague application, differing interpretations across jurisdictions, and practical difficulties in drafting.
1.Vagueness of Application: The main challenge lies in their ambiguous application.
a. Force Majeure: The clauses are quite vague and there is argument over what constitutes an event of force majeure, whether cyberattacks, pandemics, or so on.
b. Frustration of Contract: It is subjective, and courts have to decide whether an event has changed the very nature of the contract
Challenges in Drafting and Negotiating Force Majeure Clauses
Overly Broad Clauses: Some force majeure clauses cover a wide range of risks, leading to disputes over enforceability. Broad language blurs the line on what qualifies, increasing litigation risks.
Balancing Interests: Negotiating force majeure clauses is challenging due to differing interests. Suppliers may seek broad provisions for protection, while buyers want narrower terms to ensure performance.
Jurisdictional Differences
Common Law vs. Civil Law:
Common Law: Frustration is a judicial doctrine, and force majeure is a contractual provision.
Civil Law: Force majeure is statutory, leading to more predictable outcomes.
International Contracts: Variations in force majeure and frustration definitions across jurisdictions can cause conflicts of law, especially in global crises.
Proving Causation and Mitigation
Force Majeure: Parties must prove that the event directly prevented performance and that no alternatives existed. Courts scrutinize efforts to mitigate impact.
Frustration of Contract: Claims must show that the event fundamentally altered the contract, not just made it more difficult or expensive.
Risk of Opportunistic Behavior
Force Majeure: Parties may exaggerate the event’s impact to avoid performance, especially in widespread crises, leading to disputes.
Frustration of Contract: While the high threshold reduces opportunism, parties may still claim frustration to escape less profitable contracts .
Future Trends –
• Digitalization and Technology –
The rise of digital contracts and smart contracts may revolutionize the application of these doctrines, embedding automated responses to force majeure events.
• Global Crises and Resilience –
Post-pandemic, businesses are increasingly incorporating comprehensive force majeure clauses and contingency plans into their contracts.
• Harmonization of Legal Standards –
The harmonization of force majeure and frustration in international law is becoming more prominent, especially in cross-border trade.
Conclusion –
Force majeure and frustration of contract are two important doctrines that help in the handling of unforeseen disruptions of contractual obligations. Although there may be different principles, their general aim is to render some just relief for which performance is no longer possible. However, they can be complex and involve litigation, especially in times of unstable markets. Therefore, applying them correctly is essential so as not to be dragged into court. Understanding the subtlety of force majeure and frustration is crucial when dealing with modern commercial contracts and ensuring adherence to standards of law.
