Frustration & Force Majeure – Two Ways to Get Out of a Contract
With the recent instability brought on by the coronavirus, I’ve received several calls asking whether a contract can be cancelled. In this post, I look at 2 ways in which you might be able to cancel or get out of a contract: the doctrine of frustration and the force majeure clause.
In law, frustration of a contract occurs when “a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract’.” Where external circumstances have changed the context of the contract, courts may not require the performance of the contract. For example, if a landlord agrees to rent out a house to a tenant, and it burns down in the meantime, the rental contract will likely not be enforceable because it is frustrated.
Of course, there is a limitation: you can’t cause an event and then rely on it to terminate a contract. Using our earlier example, if the landlord sets fire to the house, he can’t say that the contract is not enforceable. While the tenant will likely not want to rent out a burnt down house, the tenant might be entitled to damages from the landlord.
Where the frustration of a contract occurs, the parties should be placed in the same position they were in before the contract was agreed to. This may require the refund of deposits, exchange of documents and other acts to be performed.
But what about costs incurred by a party in anticipation of the completion of a contract? If the contract itself does not provide who is responsible, legislation like the Frustrated Contracts Act might provide clarity. This Act allows parties to ask a court to determine what reasonable overhead costs are and who should pay them. It also allows courts to determine who non-monetary benefits should be returned.
Another way of getting out of a contract is by relying on a force majeure clause written into the contract.
Force majeure is a French term meaning “superior force”. It is a clause in a contract Which “generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill.”
Like the doctrine of Frustration, the force majeure clause cannot be relied upon if one of the parties caused the peril.
Whether force majeure will apply will depend on what the contracting parties considered to be a force majeure event. Not all serious events will qualify as a force majeure event. The key consideration is whether the event makes performance impossible. Not if it makes performance unprofitable.
A force majeure clause may look like this: “Neither party shall be liable to the other in respect of a failure by that party to comply with this obligations under this Agreement to the extent that the failure in question is attributable to any circumstance or cause beyond the reasonable control of that party.”
Or like this: “Party A shall not be liable for any damage, cost or loss of profit of Party B arising from a failure by Party A to comply with its obligations under this Agreement, where that failure is attributable to fire, flood, storm, strike, riot, any terrorist act, any act of war (whether or not declared), or of any government or other similar entity exercising de facto sovereignty for the time being in any relevant jurisdiction, including any embargo or restriction upon shipping or transport.”
Unlike the doctrine of Frustration, there is no automatic right at common law or by legislation for a party to claim force majeure. Force majeure can only be used to get out of a contract if it is explicitly included in the contract.
In summary, someone relying on a force majeure clause will have to prove that:
- the event falls within the type of cancelling event spelled out in the force majeure clause;
- the events were beyond his or her control; and
- that there were no measures that he or she could have undertaken to prevent or avoid the event or its consequences.
Claiming frustration and force majeure are only 2 ways of getting out of a contract. There are many more. However, it’s worthwhile considering which events would or would not prevent the performance of a contract, and to plan around them.
Need to get out of a contract or enforce one? Looking to make your next contract as strong as possible to prevent someone from cancelling it? Contact me today for a free initial telephone consultation – (289) 291 7655.