Bishop & Sewell

Generally, for there to be a contract, each party must perform some act. This may, for example, be to provide goods or services, or alternatively it may be remunerating the other party.

A breach of contract will arise where one party is unable to discharge their obligations. This may be that they are unable to provide the goods or services specified under the contract, or they are unable to obtain the funds required to remunerate the other party.

Some breaches may be minor in nature, and the innocent party will nonetheless want the contract to continue, say if you arrived five minutes late but this was not an agreement where your arrival time went to the root of the contract.
Other times a party may want to terminate the contract where the breach is to a fundamental matter, such as providing beanbags when orthopaedic chairs were required (nb: I have no qualification to determine whether beanbags are a suitable alternative!).

When a breach arises it may be due to a failure or default by one party (or both), or it could have arisen through a simple mistake (for example, the eponymous fork handles).

Often a party will know in advance if they are going to breach the contract (which could lead to an anticipatory breach), other times their knowledge will arise at the same time as the breach.

Sometimes a party will seek damages (money to place them back in the position they would have been but for the harm), or sometimes a party will want to determine (end) the contract.

Given the current climate, with enforced social distancing, restrictions on trade, etc. many businesses and individuals out there will, amongst other things, be considering:

a) whether to terminate any contracts,
b) what is their exposure to pay / option to recover any damages,
c) whether any damages would constitute a penalty,
d) how a prospective claimant can demonstrate they have mitigated their losses; and
e) what potential there is to defer complying with their obligations.

It is always wise to remember that there may be a breach by both parties (each giving rise to their own remedies) and even if a party has an option to terminate, they may yet wish to affirm the contract. However, what happens when both the parties are innocent and it is an intervening act outside of their control which has created the breach?

Doctrine of Frustration / Force Majeure Clauses
Much before March 2020, the general person in the street will have been unlikely to have come across this Doctrine or given these clauses much consideration when glancing through their terms & conditions.

Effectively, they serve a similar function;

• a force majeure clause is a contractual clause which, subject to its construction, allows a party to avoid their contractual obligations when an intervening event (caused by neither party to the contract) leads to an inability for a party to discharge their obligations; and
• The Doctrine of Frustration (the Doctrine), as codified through the Law Reform (Frustrated Contracts) Act 1943, effectively fills the void that exists when a Force Majeure clause cannot be relied upon (either for poor drafting or the absence of a written contract entirely).

When can a Party rely on this?
The starting point (remembering that each Force Majeure clause may be constructed slightly differently) is that if a party is unable to discharge their contractual obligations, owing to an event or circumstance outside of their control, then they may be released from these obligations. These types of clause often contain a list of circumstances for when the clause can be activated.

The Doctrine does not have the same clarity.

There are various tests in relation to whether or not a contract is deemed “frustrated”, however the simplest method of assessment is whether:

a) it is impossible to fulfil the contractual obligations; or

b) if attempting to fulfil the obligations, the fulfilment would be radically different to those terms which were contracted upon.

This may mean the subject matter has been destroyed or, as you may find today, the services cannot be provided due to enforced isolation.

It should be noted that with the Doctrine, the circumstances must have been unforeseen, therefore if the contract makes provision for those circumstances, there may be no ability to rely on the Doctrine.

What happens if a Party relies on them?
The Doctrine, if the parties agree the contract is frustrated, or the court determines it as such, will lead to the immediate ending of the contract and the release of both parties from any further contractual liabilities.

Accordingly, parties generally prefer to include a force majeure clause where possible as it provides parties the freedom to set out their own remedies, such as simply suspending the obligation to a later stage but allowing the contract to remain in existence.

Certain legislation may enable a party to recover sums paid in advance of a frustration event but could in either circumstance still be subject to a challenge in court.

Should you seek to rely on these?
Each set of circumstances is generally different, and each set of contracting parties may have their own needs and objectives, therefore there is no simple yes or no answer.

Force Majeure clauses are slightly easier to navigate, as it will be clearer from the wording as to whether a party can rely upon it in the current circumstances, where the burden of proof rests and whether there are alternative options other than determining the contract. As the terms have already been agreed, it is generally quicker to establish the on-going position between the parties.

The Doctrine is an entirely different beast, as any negotiations take place after the frustration event rather than before.

You may find that the party you have contracted with is simply willing to agree that the contract is frustrated. If they do not agree, the court may need to make a finding of fact as to whether the renunciation of the contract was lawful, owing to the contract being frustrated, or whether it was unlawful and follows the usual rules on damages arising from an anticipatory breach.

If they do agree, it may be that even in the absence of a Force Majeure clause a contracting party is willing to suspend the discharge of contractual obligations for the intervening period, or vary the obligation to a method which can be complied with, because it is not in their interest for the contract to cease.

A final point contracting parties will consider is whether any dispute is in fact proportionate. This goes to whether:

• the sums recoverable justify the costs in pursuing an action for recovery (those without cost indemnity clauses will likely be less inclined to pursue these);

• any damage clauses are enforceable or could themselves be unlawful; and

• in the event a Claimant has failed to mitigate their losses, is the value of any claim lower than first presumed?

What should you do now?
Before taking any steps, either affirming or seeking to terminate any agreements, parties will want to consider the terms against which they have contracted, potentially seeking independent advice as to how the court may interpret the agreement against the specific circumstances. It is worth remembering that oral agreements are treated the same as written ones.

Any party considering whether they can rely on a force majeure or the Doctrine will want to check that there is nothing in their power to ensure they could perform their obligations, that the circumstances to rely on a particular clause have come into existence, that any contract does not already make provision for these circumstances and that they have not brought the circumstances into existence.

Finally, parties will want to consider what they want to achieve – either terminating the contract or simply placing the same on hold; seeking damages; or an amalgamation of the potential remedies.

In the event that a party has not obtained independent advice before seeking to negotiate (without prejudice) a variation / release, then it may still be prudent to have any agreed terms reviewed and reduced to writing in a clear an unequivocal fashion, to avoid further complicating matters with terms which are less beneficial than first thought, or themselves could become frustrated.

Charles Jamieson is an experienced Legal Executive in this firm’s Dispute Resolution department handling Commercial, Property and Chancery Disputes. Charles works alongside Andrew Kavanagh (Company Commercial), Karen Bright & Lee Stafford (Dispute Resolution), Senal Patel (Commercial Property) and Rhian Radia (Employment) in providing a full spectrum service to businesses seeking advice.

The above is accurate as at 31 March 2020. The information above may be subject to change during these ever-changing times.

The content of this note should not be considered legal advice and each matter should be considered on a case by case basis.

Category: News | Date: 31st Mar 2020

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