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“Force Majeure”, Frustration Of Contract And Covid-19 Issues

June 2020

“Force Majeure”, Frustration Of Contract And Covid-19 Issues

 

“Force majeure” is a French term that is commonly inserted into commercial contracts to cover a wide variety of unexpected circumstances. The term equates to the phrase – “Act of God”. If an event is beyond human control, it means that a party may be excused from performance of their obligations under a contract without being subject to penalties, damages, or loss of profit claims from the other party.

 

Even if the contract does not have a “force majeure” clause, there is a legal doctrine known as “frustration of contract performance” that may operate in a similar way.

 

Common situations will be World Wars, natural disasters, and relevantly to our present circumstances, pandemics.

 

“Force majeure”

Whether a “force majeure” clause in a commercial contract covers the present pandemic, will depend upon the wording of the contractual clause. Some “force majeure” clauses are very specific and may be limited to natural disasters only (such as earthquakes or weather events). But some clauses may include” disease” or similar, and travel or import/export restrictions may qualify as “acts of state” or “government restrictions”.

 

So, each “force majeure” clause needs to be carefully considered before a party to a contract seeks to rely on it.

 

A party seeking to rely on such a clause must also weigh up whether the circumstances make performance of its contract obligations impossible. If a party wrongfully uses a ‘force majeure” clause, then they will be subject to claims from the other contractual party for damages, loss and potentially other penalties.

 

Frustration of Contract

If a contract does not contain if “force majeure” clause, there is the legal doctrine of “frustration” that may apply. This doctrine releases a party from a contract where through no fault of that party and intervening event makes performance impossible or radically different from what the parties agreed.

 

This can include a wide range of factors, such as Government directives, or where the purpose of the contract no longer exists (such as cancellation of an event).

 

Again, it is very important to consider whether this doctrine applies to a party’s circumstances, as if they get it wrong, the other party can sue for damages, which may include loss of profits.

 

A loss of profits claim can be very significant, as it means all the profits the other party reasonably expected to make from the contract will have to be paid by the non-performing party.

 

Conclusions

So as always, it is important to get legal advice on your particular circumstances if you are a party to a contract where circumstances have altered to such an extent that you believe performance of your obligations under it are no longer possible.