Frustration and “Force Majeure”
A review of the modern common law doctrine of frustration in the context of contract law.
The doctrine of frustration arises out of a need for the recognition that it may not always be possible to perform a contract in the manner originally intended.
To better understand the modern common law doctrine of frustration, which may arise in the context of contract law, it is helpful to refer to the statement of Lord Judge in ABC v XYZ.
Here, he explained that:
“Frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. It was not this that I promised to do.”
Following Lord Judge’s definition, in order for a contract to be frustrated, it is essential that performance of said contract, in the new situation, be “radically different” from that originally contemplated. Combined with the fact that the doctrine of frustration is applied “within very narrow limits”, it is by its nature inherently uncertain.
In relation to commercial transactions, certainty is of great importance. Given the inherently uncertain nature of the doctrine of frustration and the strict confines within which it operates, it is common for sale contracts and charterparties to attempt to obviate this uncertainty by inserting express contractual provisions into the sale contract. Such provisions are commonly referred to as “force majeure” clauses.
The aim of a “force majeure” clause is to provide relief to one or both parties to the contract on the occurrence of a particular event. The clause may provide for a total discharge of the contract on the occurrence of the specified event. If so, it will resemble in effect, the common law doctrine of frustration. However, it is more common for a “force majeure” clause to provide relief in the form of a suspension of performance under the contract. When and how the clause operates will depend on the wording of the clause and is thus a question of construction.
Sellers shall not be responsible for delay in delivery of the goods or any part thereof occasioned by any Act of God, strike, lockout, riot or civil commotion, combination of workmen, breakdown of machinery, fire or unforeseeable and unavoidable impediment to navigation, or any cause comprehended in the term “force majeure”.
If delay in delivery is likely to occur for any of the above reasons, Sellers shall serve a notice on Buyers within 7 consecutive days of the occurrence, or not less than 21 consecutive days before the commencement of the contract period, whichever is later. The notice shall state the reason(s) for the anticipated delay.
If after serving such notice an extension to the delivery period is required, then the Sellers shall serve a further notice without delay, but in any case not later than the last day of the contact period of delivery. If delivery be delayed for more than 30 consecutive days, Buyers shall have the option of cancelling the delayed portion of the contract, such option to be exercised by Buyers serving notice to be received by Sellers not later than the first business day after the additional 30 consecutive days.
If Buyers do not exercise this option, such delayed portion shall be automatically extended for a further period of 30 consecutive days. If delivery under this clause be prevented during the further 30 consecutive days extension, the contract shall be considered void. Buyers shall have no claim against Sellers for delay or non-delivery under this clause, provided that Sellers shall have supplied to Buyers, if required, satisfactory evidence justifying the delay or non-fulfillment.
The meaning of strike was considered in relation to a demurrage clause in a charterparty by Lord Denning M.R. in “The New Horizon” to encompass:
“a concerted stoppage of work by men done with a view to improving their wages or conditions, or giving vent to a grievance or making a protest about something or other, or supporting or sympathizing with other workmen in such endeavor. It is distinct from a stoppage which is brought about by an external event such as a bomb scare or by apprehension of danger.”
Accordingly, clause provides relief to the seller if the goods are delayed by, for example, a strike in that it extends the delivery period under the contract. However, if delivery is delayed for more than 30 consecutive days the buyer can cancel the delayed portion of the contract. If the buyer fails to do so, the delivery period is extended for another 30 days. If after the expiry of these 30 days delivery has still not taken place then the contract becomes void.
If the seller wishes to rely on the clause, it must issue a notice stating the “reason(s) for the anticipated delay”. The clause is however silent on what it is the seller must show. Given that the clause contains the phrase “delivery under this clause”, it is submitted that the seller must show that only the particular shipment has been delayed. It follows that an actual shipment rather than a hypothetical shipment has to be delayed.
It is now unclear when the seller must serve the second notice. The previous version of the clause simply required that the seller serve this notice “not later than two business days after the last day of the contract period of delivery”. However, the latest version of the clause requires that the seller serve the notice “without delay, but in any case not later than the last day of the contract period of delivery”.
It is submitted that the addition of the phrase “without delay”, must mean that a seller cannot wait until “the last day of the contract period of delivery” to serve the second notice in circumstances that indicate that an extension to the delivery period would be required.
The dividing line between acting without delay and acting with delay will necessarily be a fine one and the situation is further complicated by the fact that the duration of the events in question, such as strikes, are by their nature inherently uncertain. The problem is only exacerbated in the common situation of a string sale. Needless to say, where the seller has invoked the “force majeure” clause, he is advised to act promptly in serving the second notice to extend the contract period of delivery in order to avoid allegations that he has failed to act without delay by a buyer looking to escape a bad bargain.
Article by Eurof Lloyd-Lewis and Alexander Sandiforth