The doctrine of frustration

Political upheaval is nothing new, as we realise when we reflect on the 100th year following the outbreak of the First World War. Unpredictable events such as war, hostage taking, mass migration of refugees, and sanctions which impose trading restrictions can all impact on business in the international commercial environment. There is a tendency to believe that should these circumstances affect your contract the law will come to your aid with what is known as the doctrine of frustration: “Our performance of the contract was frustrated - we can’t carry on”. But frustration is not quite that easy.

English law is often used in international contracting. It says responsibility to perform under a contract can be discharged when an event renders performance of the contract impossible or radically different to that which was intended by the parties when the contract was formed and that event occurs after the contract has been formed, is not due to the fault of either party, and was not provided for in the contract.

The courts have interpreted the first requirement of impossibility or radically different particularly narrowly. In relation to the Suez Crisis in 1956, the fact that goods would have to be shipped around the Cape of Good Hope at much greater expense was not frustration. It has since been expressly stated that frustration does not exist to “relieve contracting parties of the normal consequences of imprudent commercial bargains”. Nor are changes in economic conditions alone sufficient to frustrate a contract - for example, a crash in the stock market or property values.

Frustration is a common law concept and therefore parties often look at drafting in specific provisions such as force majeure clauses

The outbreak of war can render a contract frustrated in a number of different ways. Where it leads to one party to a contract becoming an “enemy”, trade with that party becomes illegal. Consequently, it will be automatically dissolved. Whilst sanctions can in certain circumstances lead to a contract being impossible or radically different, the doctrine of frustration does not apply automatically whenever sanctions are imposed. Sometimes the sanctions themselves explicitly only ban contracts going forwards, not those already in place. The courts have demonstrated that they will look into the effect of sanctions, including the terms of any requirement for additional permissions or licences, in determining whether the conditions imposed are sufficient to frustrate the contract.

The general rule under English law remains that a party to a contract must perform exactly what it undertook to do. Frustration is a common law concept and therefore parties often look at drafting in specific provisions such as force majeure clauses. The purpose of such a clause is to set out circumstances under which, on their occurrence, the parties will be released from some or all of their contractual obligations. These clauses typically include a list of events which the parties agree will have the effect of terminating the contract, such as war, earthquakes, floods, and so on. Care is needed though. Such a clause will only apply if the event in question is listed within the force majeure events specified within the clause. Due to uncertainty about how such lists will construed by the courts, many force majeure clauses are lengthy. A clause referring to war might include specific reference to civil war, rebellion, and revolution to ensure that the party relying on the clause can show that the event fell within the definition contained in the clause.

Further, to be enforceable, a force majeure clause must do more than just list the events; it must also include an “operative provision”, setting out what happens when the specified event occurs. Such consequence can include provisions to terminate or suspend some or all of the obligations within the contract, or to allow either party to terminate the contract by serving notice to the other. Force majeure clauses have, for instance, been upheld in the case of sanctions.

In a volatile world, the risk of being left exposed because of world events is substantial. Relying on frustration alone and the common law is a high risk strategy. Frustration provides no protection where a contract simply becomes more difficult or expensive to perform.

A well drafted force majeure clause can provide greater certainty and apply in a wider array of situations. Nevertheless, to be effective the force majeure event must fall within the type of events specified in the clause, and it must be shown that the event must have caused the delay, expense or other consequence stipulated within the clause itself. Challenging drafting for challenging times.

James Bessey is a partner in the construction, infrastructure and projects department at DWF