Whilst we ease our way out of the pandemic, it is a good time to reflect on the last two years, whilst reminding ourselves of the impact such an unprecedented event can have on the commercial world and the way we all do business.
One of the most common legal issues that has arisen over recent times concerns force majeure clauses and frustration arguments in contracts.
Force majeure clauses typically allow one or both parties to a contract, to excuse their performance obligations following certain events having taken place, with the party concerned then not being liable for its failure to perform to the level agreed in the contract.
Force majeure clauses have to be expressly set out in contracts and to prevent or limit litigation on the subject, it is good advice to ensure they are clear, concise and certain over their meaning. They do not necessarily have to be labelled ‘force majeure’ but to avoid any doubt, it is probably wise to do so.
If they are not labelled, then you would need to consider clauses that anticipate an event that is beyond the scope of the contract, such as an act of God, a war or a pandemic. The events could also be legal, such as restrictions imposed during a pandemic that prohibit people from travelling or working. But whatever the event, it must affect the ability of a party to perform its obligations under the contract.
Force majeure contracts are, after all, express terms required to be agreed by the parties because under English common law, there are limited remedies available. The most common limited remedy is that of frustration.
This common law doctrine, which can (and does) only apply in certain restricted circumstances, states that a contract becomes frustrated when it becomes impossible to perform. Events that lead to frustration are not the same as those that are (reasonably) unforeseeable or unforeseen. If the parties in some way contemplated an event, (for example an act of God), then there was some element of risk applied to that event and frustration would be prevented.
On the other hand, if there was no contemplation of that event taking place, then risk is less likely to have been allocated and it is possible to make the case for frustration.
The difference between force majeure and frustration
Another major difference in the two legal doctrines is that force majeure terms will usually temporarily suspend a contract, whereas frustration will bring it to an end.
In practical terms, frustration brings a party’s current and prospective rights and obligations to an end; it does not work retrospectively, nor does it render the contract void, but it in essence ends it.
Contracts are the legal framework for business relationships. In the food, drink and hospitality sector in particular, typically they define long-term agreements and relationships spanning several years, if not decades.
It is human nature to expect that life sometimes gets in the way, but for a business with long-standing arrangements, or one that survives on a framework of complicated contracts, life simply can’t get in the way.
Suppliers and customers in the food, drink and hospitality sector need to consider carefully what the outcomes could be if their contracts were not performed as agreed. Presumably, those business would rather weather the storm and get back to work rather than bring their contracts to an end.
Would a supplier of wine want their contract to be discharged or temporarily suspended because they were unable to deliver a large shipment because of issues in their manufacturing chain? Would a wedding venue want to refund a large booking because of storm damage that could be repaired in time for the intended special date?
Parties providing goods and services must bear in mind all potential factors that could arise in the performance of their contracts, with consideration given to the risk of potential events (even if they are reasonably unforeseen or unforeseeable).
It is exactly this consideration that leads to force majeure clauses entitling the wine supplier to pause operations or the wedding venue to work with its bride and groom to get them to their special date, without bringing the contract to an end.
Unless express force majeure clauses are included in contracts, frustration will most likely apply. For that reason, many businesses have probably learnt a lot from this pandemic, including the risk of non-performance vs what was originally agreed between parties.
The pandemic will also likely continue to lead to litigation and as we emerge from it, businesses will really start to reflect on their original legal arrangements and those that have avoided harsh lessons should now re-evaluate them to ensure they avoid problems in the future.