COVID-19: Force Majeure vs Frustration of Contract
In the context of COVID-19, the ongoing performance of contracts has become difficult for many individuals and commercial parties. Some have had travel plans cancelled, some businesses have been unable to open their doors to customers, and other businesses have seen an increase in business, but suppliers have been unable to deliver. What happens to contractual obligations during a pandemic, and when can the law assist?
“Force Majeure” is currently having a moment in the public’s conscious, though what many refer to as “Force Majeure” is more appropriately called “Frustration of Contract”. Force Majeure itself refers to certain contractual terms that often temporarily suspend the obligation of one party to continue to perform its obligations under that contract. A Force Majeure clause, or contractual term, must exist in the language of a contract for it to be utilized.
For example, if a contract were formed for Bob to purchase 30 apples from Amanda on the 1st of each month for the next 5 years at a cost of $100 per year, and those were the only terms of the contract, Force Majeure would not exist, and could not be used to suspend performance. What Bob and Amanda would need to do, if they wanted to have Force Majeure as an option, would be to agree to include a term in their contract that would specifically allow for suspension of performance (either on the buy side, or the sell side) in the event that a pandemic or other unforeseen circumstance such as a war or natural disaster were to occur. Such a contractual term could be as complicated or as simple as the parties prefer, as long as it is not ambiguous. Sometimes, Force Majeure clauses have notice provisions, through which the party seeking to rely on the Force Majeure must put the other party on notice prior to suspending performance. Typically, Force Majeure clauses do not allow one party to entirely walk away from a contractual obligation, and instead simply temporarily suspend it. As such, a party would often have an ongoing obligation to reassess whether performance can continue. In a situation such as the current pandemic, this would mean that a party would have to continue performance once it was reasonably able to do so (or perhaps another standard as defined in the Force Majeure clause itself).
If there was a disagreement as to whether a Force Majeure clause applied, a court would interpret the terms strictly, meaning there would need to be clear language for one party to rely on. Generally, if a Force Majeure clause did not include a specific reference to a pandemic, it would be very difficult to rely on it based on the current COVID-19 crisis.
Following the outbreak of COVID-19, Force Majeure clauses are certain to be incorporated more often and drafted with an increased focus. Barriston can assist with the proper negotiation and drafting of such a clause.
Frustration of Contract
As stated above, if you or your business do not have a Force Majeure clause in your contract, it would not affect the performance obligations of the parties. In such a circumstance, if one party does not perform, this would be considered a breach of contract and entitle the innocent party to the regular remedies of contract law. However, the doctrine of frustration of contract could assist a party in situations like this pandemic without the existence of contractual language. Frustration of contract is a common law doctrine, meaning it exists outside of the contractual language. A court could determine a contract is “frustrated” even if there are no terms in the contract allowing for a contract to be frustrated. There are a number of circumstances that must exist for the doctrine to be relied on, but essentially, frustration of contract can apply when performance of a contract becomes impossible as a result of an unforeseen circumstance out of the control of the contracting parties. When a contract is frustrated, the contract ceases, and each party is no longer obligated or liable to the other under the terms of that contract.
Because frustration can be imposed on the parties by a court, the standard to meet before a contract is frustrated is significant. Mere hardship or difficulty in performance is not sufficient, and a party needs to prove that it has become impossible to perform, even through alternative or lesser means. There must also be some level of permanence to the change in circumstances. As such, certain long-term contracts with timeframes beyond a potential recovery post-pandemic may not be considered frustrated by a court. Alternatively, if COVID-19 is still affecting contractual performance on a lengthier time-frame, such as multiple years, this could be considered a permanent change.
Each contract and fact situation is different, and the lawyers at Barriston can help assist to determine if frustration of contract would apply to your situation.
Justine Vanden Ende, Associate