We are increasingly asked to advise in situations where, although there has been no default, one party is trying to extricate itself from a contract.
As every law student knows, the law will not allow a party to get out of a bad bargain and the occurrence of unanticipated events will not generally allow a party to avoid its contractual obligations. However, all will depend on the terms of the contract and the nature of the obligation undertaken. In exceptional circumstances the doctrine of frustration may apply. Also, the parties may have included a force majeure clause in their contract, which may offer them a way out.
Frustrated? You bet
A contract is frustrated (and automatically terminated) when a supervening event occurs that makes the contract impossible to perform, or the obligations become fundamentally or radically different to those originally undertaken.
A contract is not easily frustrated and frustration does not cover contracts that were always going to be impossible to perform. For instance, where it turns out that the ground is unsuitable for a skyscraper, the contractor will not be excused its promise to build it unless the contract has, for example, excluded the risk of ground conditions.
Financial issues are usually the reason why a party tries to end a contract, but it does not necessarily amount to frustration. Parties to a contract that provides for payment in, say, euros will be bound regardless of shifts in the exchange rate. A more extreme scenario (where we have been asked to advise) is what will happen if the euro fails entirely or one country leaves the euro. It is uncertain whether an English court would find that a contract providing for payment in euros is frustrated if the euro ceases to exist, or if it is no longer the local currency of one of the parties.
The key to establishing frustration is to identify the parties’ contractual obligations at the date of the contract, and how the event in question alters them. Situations that may amount to frustration have included:
- Destruction of the building where works were to be undertaken
- Laws making the act promised under the contract illegal.
- Government restrictions on building.
- Cancellation of an event that was central to the obligations under the contract.
Parties are advised that events that delay performance rather than alter the obligations (such as a strike), do not generally amount to frustrating events. However, if the delay is particularly long, or has a serious effect on the obligations (such as missing an event), the impact on the obligations might be sufficient to amount to frustration.
Force majeure provisions
Frustration is difficult to establish. A contract’s force majeure provisions may offer an exit route. Force majeure is not a common law concept. It is a contractual term and what qualifies as a force majeure event depends on the contract. For that reason, a force majeure clause often has some examples of events that fall within its scope and a catch all provision such as “any event beyond the control of the parties”. However, some contracts (such as JCT 2011) do not include a definition or examples of force majeure.
Examples of common events usually listed in contracts as force majeure events include:
- Act of God.
- Civil commotion.
- Volcanic activity.
- Change in legislation.
These events are not unheard of and, in recent times, such provisions have offered the parties useful protection.
The party relying on the force majeure clause must generally show that:
- The event occurred.
- It was outside its control.
- It prevented or delayed its performance.
- It did its best to mitigate its effects.
The effect of the force majeure clause will depend on the contract. In addition to extra time and/or money, many of the standard form contracts provide for suspension and/or termination (depending on how long the event has persisted).
No way out?
It is not easy for a party to seek to avoid obligations that it has freely undertaken. Generally, once you’ve made your bed, you must lie in it. That said, in certain circumstances frustration or, more likely, force majeure may apply, but this will always depend upon the specific obligations undertaken.
Finally, don’t forget that a contract may also contain a termination at will provision (usually in favour of the employer). Although this may appear to give an unfettered discretion to terminate, care should still be taken if the right is exercised. However, that is a discussion for another time.
This blog was first published by PLC Construction as part of our regular construction blog series in which we share our practical experiences of working in construction and engineering and give our opinion on the current and future legal developments that shape and will shape the industry. Please select the link for other PLC Construction blogs.