Can Your Contract Weather the Storm?

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Force majeure

Force majeure removes liability from a party who is unable to perform an obligation under the contract, for an unforeseeable and unavoidable reason.

A force majeure clause must be expressly drafted into a contract. Each contract will have its own definition of what event or circumstance is considered beyond a party’s control. Clauses can be drafted narrowly to include specific instances that equate to a force majeure or include more broad definitions such as events “beyond the party’s control”.

A party seeking to rely on a force majeure clause will need to show that the event is the reason they have been unable to perform their obligation as intended. There will normally be a prescribed procedure for notifying the other contracting parties of the intention to rely on an alleged force majeure event.

The approach a party receiving a force majeure notice takes will be dictated by several factors. Parties in this situation should consider:

  1. Does the event relied upon, fall into the definition of force majeure in the contract?
  2. Is performance physically or legally impossible (not just difficult or unprofitable)?
  3. Has the relying party taken all necessary steps when triggering the clause?
  4. Can the parties take any steps to work around the force majeure?
  5. What relief does the force majeure clause provide?
  6. Will the inability to perform the contract lead to a termination of the contract?
  7. Is there a wider impact to be considered? For example, other contractual obligations within a supply chain.

Care should be taken where a business intends to rely on a force majeure clause, for storm-related reasons or otherwise. The effect of force majeure can include a termination of the contract which could have a  consequence for the businesses involved.

Frustration

Where a contract does not provide for the operation of force majeure, parties may seek to rely on the doctrine of frustration where they are unable to comply with a contractual term. There are extremely limited circumstances in which frustration can be established.

A frustrating event is one which:

  1. Occurs after the contract has been entered into
  2. Is fundamental to the contract and renders it entirely beyond what was contemplated by the parties when they entered the contract
  3. Is not due to an act of the party seeking to rely on it
  4. Is not the fault of the contracting parties and
  5. Is not contemplated by the contract.

If frustration is proven, both parties are automatically discharged from performance of the contract. The Law Reform (Frustrated Contracts) Act 1943 may help a party recover money paid under a contract before the occurrence of the frustrating event.

Whether a storm-related issue is a frustrating event will turn on the specific factual background and contractual terms agreed between the parties. Before alleging that a contract has been frustrated, it is worth bearing in mind that an incorrect allegation can leave a party open to a claim for anticipatory or repudiatory breach, which in turn could expose a claim for damages.

A collaborative approach?

In most cases, the best outcome for all parties will be to find a way for the contract to resume as intended.

Prompt communication of the issues faced by a contracting party may go a long way toward maintaining harmonious business relations and avoiding costly litigation. The preferred way to proceed will depend on the specific circumstances, but could include amending or renegotiating the contract to take account of the unexpected event or the deadlines imposed on the parties.

As the UK experiences an ever-evolving climate, we may see a rise in unanticipated events that affect a contract proceeding as intended. A carefully drafted force majeure clause, coupled with early intervention should a party be unable to comply with their contractual obligations, will put a business in the best position to weather these types of issues.

If you require any support where contractual terms have become difficult or impossible or with drafting contracts to minimise disputes, please get in touch with our  Disputes team who will be able to support you.