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Coronavirus - What do businesses need to know about force majeure and frustration? - Ireland

  • Ireland
  • General

25-03-2020

As ever increasing protective measures and restrictions are being introduced across the country to deal with the Covid-19 pandemic, many businesses may find that they, or their counterparties, are struggling to meet their contractual obligations.

References to concepts such as ‘force majeure’ and ‘frustration’ are widespread since the outbreak of Covid-19, but what exactly do they mean and how do they relate to businesses and their contractual obligations? In this note we discuss the circumstances in which force majeure or the doctrine of frustration might apply to contractual obligations.

1. Force majeure

What is force majeure?

Many commercial contracts include force majeure clauses which will relieve a party from its obligations under a contract upon the occurrence of certain unforeseeable, unavoidable events such as natural disasters, ‘acts of God’, outbreaks of war, nationwide strikes and so on. Notably, these provisions may also extend to the occurrence of pandemics and/or epidemics which may be seen as triggering events (the “force majeure event”). Covid-19 was declared a Pandemic by the World Health Organisation on 11 March 2020. Therefore, if a force majeure clause refers to a Pandemic, the clause will likely cover Covid-19.

A typical force majeure clause suspends a party’s obligations to perform under a contract for the duration of the extraordinary force majeure event. If the duration and impact of an extraordinary force majeure event extends beyond a certain specified time, a party may also be able to terminate the contract, depending on the drafting of the contract in question.

Key issues to consider

Does the relevant contract contain a force majeure clause?

Force majeure is a creature of contract. This means that a force majeure clause must be included in that contract. If not, the Irish courts will not read one into the contract.

How is the force majeure clause drafted?

Force majeure clauses differ from contract to contract. Each particular contract will need to be analysed in order to ascertain whether Covid-19 is deemed a force majeure event.

We can look to the English courts for guidance on the interpretation of force majeure clauses. In Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (No 2) (The Marine Star)1, the UK Court of Appeal held that the proper approach to interpretation of a force majeure clause is by reference to the words the parties had actually used in the contract, not the parties general intention.

Is it legally and/or physically impossible to carry out the contractual obligation?

A party claiming relief from a contractual obligation due to a force majeure event must prove2 that they were prevented from carrying out that obligation (in other words, that carrying out that obligation was actually legally or physically impossible), and not simply that it has become more difficult or more unprofitable.

A force majeure clause will normally require a party to show that it used reasonable endeavours to avoid or lessen the effect of the force majeure. In Channel Island Ferries Ltd v Sealink UK Ltd3, the UK Court of Appeal said that any clause which included language referring to events “beyond the control of the relevant party” could only be relied on if that party had taken all reasonable steps to avoid its operation or mitigate its results.

Is there a causal link between the force majeure event and the failure to perform?

It is likely that a causal link will need to be established between the Covid-19 pandemic and the failure to perform.

Is there a notification provision in the force majeure clause?

It is important that parties to contracts carefully consider their obligations in relation to delivery of notices. Often, force majeure clauses contain notification provisions obliging a party attempting to rely on a force majeure clause to formally notify the other party of their intention. These notification provisions often require delivery within a specified time frame (eg within five days of the force majeure event arising) and this may have to be done by registered post or by hand. It is important that parties do not fall foul of the notice provisions.

2. Frustration

What is the doctrine of frustration?

The doctrine of frustration deals with cases where contractual obligations can no longer be fulfilled or performed as a result of circumstances beyond the control of either party4. The key point being that the ‘event’ is entirely outside the control of either party5 rather than a self-induced frustration. It should be noted that a narrow approach is taken by the Courts when considering the doctrine of frustration and a very high threshold must be met to establish frustration.

Key issues to consider

When may a contract be discharged?

A contract may be discharged on the grounds of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil that contract. Frustration is prospective in its effects.

What is the effect of frustration?

If a contract is frustrated, all future obligations are discharged6. If the court accepts that a contract has been frustrated, the court will order that all future obligations are discharged. Accordingly, a frustrated contract is discharged automatically with the parties excused from any future obligations.

With which party does any loss lie?

It is not possible to definitively conclude with which party the loss might lie and that would depend on the particular circumstances and the timing of the frustrating event. Older case law suggests that the loss lies where it falls as at the date of frustration. In Appleby v Myers7, the plaintiff’s action for monies due failed where it was held that the obligation to pay had not fallen due at the date of the frustrating event.

What are the facts of the situation?

Each factual situation must be considered on its own merits8. In the Irish case of Ringsend Property Ltd v Donatex Ltd9, Kelly J described the doctrine of frustration as being “one of limited application and narrowness”. Kelly J was referring to the fact that it arises where performance of the contract becomes impossible because of an unforeseen supervening consequence.

3. Practical tips to decide if Covid-19 might be a force majeure event or if the doctrine of frustration might apply

Covid-19 could constitute a force majeure event or trigger a force majeure clause in a given contract, however this will depend on the wording of the underlying contract between the parties.

Parties should therefore:

(i) Review all relevant contracts

(ii) Consider the precise wording of any force majeure clause

(iii) Be cognisant of any notification provisions in the force majeure clause

(iv) If there is no force majeure clause, consider whether there are grounds to rely on the doctrine of frustration

(v) Identify (precisely) why any particular obligation cannot be performed

(vi) Record the impact and hardship that Covid-19 is having on your business so that you can later rely on these records

(vii) Assess whether the impact of the force majeure or frustrating event can be mitigated

How Eversheds Sutherland can help

We remain fully operational during these difficult times and all our lawyers are readily available and contactable at their usual email address or telephone numbers.

If you have any queries or wish to discuss any aspect of this briefing in more detail please get in touch with your usual Eversheds Sutherland contact or:

Pamela O’Neill, Partner and Head of our Dispute Resolution & Litigation Department - pamelaoneill@eversheds-sutherland.ie

Neil O’Mahony, Partner in our Dispute Resolution & Litigation Department - neilomahony@eversheds-sutherland.ie

Aonghus McClafferty, Associate in our Dispute Resolution & Litigation Department – aonghusmcclafferty@eversheds-sutherland.ie

Peter O’Neill, Partner in our Corporate and Commercial departments - peteroneill@eversheds-sutherland.ie

Marie McGinley, Partner and Head of IP, Technology & DP - mariemcginley@eversheds-sutherland.ie

For support on legal issues facing your business in light of the outbreak of Covid-19, please visit our Coronavirus hub to get our latest information and guidance.

1 [1996] 2 Lloyds Rep 383

2 Tennants (Lancashire) Ltd v G.S. Wilson & Co Ltd [1917] AC 495

3 [1988] 1 Lloyd's Rep 323

4 For example see Taylor v Caldwell [1863] 3 B&S 826

5 Doctrine of Self-Induced Frustration – Herman v Owners of S.S. Vicia [1942] IR 304

6 Kearney v Saorstat and Continental Shipping (1943) Ir. Jur. Rep. 8 

7 (1867) L.R. 2 C.P. 651

8 McDermott & McDermott, Contract Law (2nd edn., Bloomsbury Professional 2017) 21.03

9 [2009] IEHC 568

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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