Welcome to our new series of ‘back to basics’ blogs in which we will provide blogs focused on common legal issues. This blog post will address force majeure and frustration, two concepts which charterers have regularly relied on since the presence of COVID-19, often with varying degrees of success.
English law generally holds parties who have contracted to do something accountable even where subsequent events make performance challenging or expensive. Nevertheless, two exceptions can often be invoked, frustration and force majeure. It is important to note that under English law force majeure only applies if there is a specific clause within a contract that provides for it, while frustration is a common law doctrine. There has been renewed interest on force majeure, in particular, because of the COVID-19 pandemic.
Force majeure clauses can vary, however the three general requirements that must be met are:
- There must be an occurrence of an event specified in the clause. The events giving rise to force majeure are often extraordinary events which are listed in the force majeure clause and which must usually be outside either party’s control. An example of a case where it was discussed what “outside either party’s control” means is Lebeaupin v Crispin  2 KB 714. At para. 719 it was held that force majeure events were “circumstances independent of the will of man, and which it is not in his power to control”. Typical examples of force majeure events are wars, strikes, earthquakes and other extreme weather. However, due to the fact, there is no general principle of force majeure in English law, if a contract refers only to a “force majeure event” then it will be a matter of contractual interpretation to determine what this means in the circumstances.
- That the events have “prevented”, “hindered” or “delayed” the party from performing under the contract (see Tennants (Lancashire) Ltd v G.S. Wilson & Co. Ltd  AC 495 where the delivery of chemicals was prevented by the First World War). The actual wording used must be carefully analyzed.
- That no reasonable steps are possible to avoid the events or the consequences. In Channel Island Ferries Ltd v Sealink UK Ltd  1 Lloyd’s Rep. 323 the Defendant failed to make two named vessels available for a bareboat charter. The court held that they had failed to search for and tender alternative vessels, which prevented them from relying on the force majeure clause. A more recent example is Seadrill Ghana Operations Ltd v Tullow Ghana Ltd (2018) where the court stated that when considering reasonable steps to mitigate, a party should consider the interests of both contracting parties and not just its own.
The following should be considered in relation to invoking a force majeure clause:
- What constitutes a force majeure event – different contracts will have their own approaches to this (whether they use general wording or specify an exhaustive list). Wording such as ”all other causes beyond the control of the [Party]” will need to be treated with care, as the ‘other causes’ must be similar to the specific events previously listed in the clause. However, if the wording is ‘all other causes whatsoever’, this will widen the types of other, non-stipulated events that will trigger the clause.
The COVID-19 pandemic could be a force majeure event, under a clause that specifically referred to a “epidemic” or “pandemic”. Indirect events caused by the COVID-19 pandemic such as government action or non-performance by suppliers could also trigger a force majeure clause. Also, if the list only includes non-exhaustive examples, and subject to whether any other events would need to be similar to those listed, or there is no list at all but the clause only specifies ‘exceptional’ circumstances, the COVID-19 pandemic may still be seen as a force majeure event.
- Events that will not usually lead to force majeure – it is important to be aware that certain events will not usually result in force majeure. In relation to COVID-19 this means that just because a parties’ situation has become “economically more burdensome” (see Thames Valley Power Ltd v Total Gas & Power Ltd  1 Lloyd’s Rep. 441) this will not in itself result in being able to successfully invoke a force majeure clause.
- Causation – it has to be proven that the force majeure event is the sole effective cause of non-performance which has prevented the party who is trying to rely on it from undertaking its obligations under the contract (see Seadrill Ghana Operations Limited v Tullow Ghana Limited  EWHC 1640 (Comm)); it is not enough that it has simply happened. Depending on the precise wording of the force majeure clause, it may also need to be proven that the contract would have been performed “but for” the event (see Classic Maritime v Limbungan Makmur SDN BHD & Anor  EWCA Civ 1102). Where wording such as that the event “results from” or “directly affects the performance of either party” is used in the force majeure clause, this is an indicator that the “but for” test applies to the clause and force majeure can only be relied upon where but for the event a party could have fulfilled its obligations.
However, the above rules will depend on the wording of the relevant force majeure clause. Causation will be fact specific in each situation but the gathering of evidence is critical (government certificates, public authority, quarantine orders and port restriction notices). Parties are often quick to declare force majeure but are not subsequently able to back up their reliance on the clause with evidence. This is therefore an important aspect to bear in mind when declaring force majeure, as if challenged it will be necessary to support the declaration with hard evidence.
- Notice provisions – compliance with any notice provisions such as timing or any ongoing notification obligations is key. If notice is not provided properly, this can prevent a party from relying on a force majeure clause and the party might be liable for its failure to fulfil its obligations under the contract.
- Governing law – the governing law of the contract is important in determining whether force majeure can be invoked. In civil jurisdictions force majeure is commonly implied into contracts while under common law, the contract needs to be checked carefully for express terms.
- If a force majeure clause is successfully invoked, the consequences can vary. Some common ones are:
- Suspension – obligations are suspended while the force majeure event continues.
- Right to terminate – some clauses provide for this after a certain period of time has passed and the force majeure event is still on going. This is usually tied in with a further notice requirement. However, if a party terminates wrongfully this could lead to repudiation and therefore it is important to check the termination clause carefully in order to avoid this.
- Non-liability – once the clause has been triggered, both parties’ obligations are put on hold for non-performance/delay for as long as the event continues. This is usually specified by wording such as “Each Party shall be excused from the performance of its obligations under this Agreement to the extent that such performance is prevented by force majeure”.
- Obligation to mitigate – parties may agree to include this in a force majeure clause. For example, in Seadrill Ghana Operations Ltd v Tullow Ghana Ltd 2 Lloyd’s Rep. 628 there was a term that required both parties to “use their reasonable endeavours to mitigate, avoid, circumvent, or overcome the circumstances of force majeure”. However, the court will also imply a duty into the contract that the impacted party will have to take all possible steps to avoid the force majeure event or mitigate its results (as referred to above).
If there is no force majeure clause in a contract or it cannot be invoked, then the common law doctrine of frustration can be considered where a party is seeking to terminate a contract (rather than just excuse their failure to fulfil their obligations),although reliance on this is often not straightforward.
Frustration is a common law doctrine and therefore available even when not expressly referred to in a contract.
A contract may be automatically discharged (meaning all current and prospective rights and obligations are cancelled) under the doctrine of frustration upon an occurrence which:
- makes the contract physically or commercially impossible to perform; or
- makes the performance of the contract radically different from what was contemplated at the time the contract was entered into (see Davis Contractors v Fareham Urban District Counsel UDC  AC 696. The radically different test was strictly applied in the Suze Canal cases).
Generally, the frustrating event must occur after the contract has been concluded and must not be the fault of either party. It must also be so fundamental that it would defeat the sole ‘commercial’ purpose of the contract. For example, in Herne Bay Steam Boat v Hutton  2 KB 683, a contract for the hire of a steamship was not frustrated as the contract had not been deprived of its sole commercial purpose as it was still able to perform the day’s cruise even though the naval review, that it was the intention to observe, did not occur. Therefore, to identify whether frustration can be invoked will depend on the circumstances of each individual contract that is being disputed.
Events that could be seen as frustrating events in relation to the COVID-19 pandemic could be government orders, travel bans or the introduction of emergency legislation.
In relation to Brexit, the case of Canary Wharf (BP4) T1 Limited v European Medicines Agency  EWHC 335 (Ch) showed how difficult it can be for Brexit to be a frustrating event. The case relates to EMA’s 25 year lease at Canary Wharf in which the EMA’s tried unsuccessfully to argue that it would be frustrated by the failure of a common purpose (Brexit) The EMA’s frustration argument was that by the UK withdrawing from the EU the lease would no longer fulfil its contractually contemplated purpose (that the EMA claimed was to provide it with permanent headquarters in the EU). The judge concluded that this contemplated purpose never amounted to mutual contemplation as the lease expressly permitted the EMA to assign or sublet the property and therefore Brexit did not constitute a frustrating event.
It is important to note that a claim that a contract has been frustrated is, in practice, very difficult to maintain. There are, however, limited circumstances where it has been used successfully, such as destruction by fire or the unexpected delay in a contract’s performance due to an unexpected event or change in circumstances. It has been successfully applied in disputes involving charterparties but the fact that these have been in cases such as a seizure of a vessel during the Spanish Civil War (W.J Tatem v Gamboa  1 KB 132) and the requisitioning of a vessel (Bank Line Ltd v Arthur Capel  AC 435) indicates just how extreme the circumstances need to be. Failure of a cargo supplier to provide a cargo will not generally enable a charterer to treat the charterparty as frustrated, as the defaulting party would just be expected to find an alternative source of cargo even if that was significantly more expensive.
If frustration can be established, then the impact is that the agreement is automatically terminated. NB that this may not be the outcome a party is looking for. It is possible that events related to COVID-19 could in theory constitute frustration but this will depend on the effect the potentially frustrating event has on the contract in the specific circumstances.
Although both force majeure and frustration operate in different ways, any party wishing to invoke them must consider carefully whether or not they are able to do so, as wrongful reliance on these concepts can lead to a claim for damages for repudiatory breach, and termination of the contract by the other party.