Coronavirus mini-series: (9) frustration and force majeure – a guide for the travel industry

The COVID-19 pandemic has brought about a near complete cessation in tourism across the globe. The effects of this for consumers and commercial parties alike are far-reaching and are likely to continue into the foreseeable future.

For commercial bodies operating in the industry and considering their position, force majeure clauses and the doctrine of frustration are likely to become key. This article, by William Audland QC, Max Archer, and Spencer Turner, seeks to examine both aspects of contract law in the light of the pandemic.

Force Majeure

Force majeure is not a freestanding doctrine of English contract law; rather, parties may insert force majeure clauses into their contracts that alter their liabilities or obligations under the contract in the event of extraordinary circumstances or events beyond their control.

This differs from the position in other jurisdictions, where ‘force majeure’ is a distinct concept and courts may declare that as a matter of general principle that a particular circumstance or happening (such as a pandemic) is a ‘force majeure’ event which relieves the parties of their responsibilities under the contract. In the context of EU law, force majeure is a well-recognised defence and has been considered by the CJEU on numerous occasions.

Force majeure under English law is largely dependent on the construction of the contract itself. The parties’ intention, the circumstances surrounding the contract, and the words of the rest of the contract will be key to establishing whether or not the relevant clause is engaged. The position is different if the purpose of the contract was made in compliance with EU law, as is the case in a package travel context as set out below.

Force majeure clauses vary greatly. Some clauses will make specific provision for epidemics or pandemics. Clauses that do not make such provision but anticipate events such as ‘acts of government’, or even more vaguely, ‘force majeure events beyond the reasonable control’ are more problematic. Where the clause is vague, the preceding words and general schema of the contract will be crucial, provisions will be construed strictly, and, in the event of any ambiguity, the contra proferentem rule will apply. In Tandrin Aviation Holdings Ltd. v Aero Toy Store LLC [2010] EWHC 40 (Comm) Hamblen J examined whether or not the 2008 economic crash constituted ‘any other cause beyond the seller’s reasonable control’. In finding that it did not, he noted that the other specific examples in the force majeure clause were not at all connected with economic downturn or market circumstances. This does not mean that acts of government or disease events must be referenced in order for a court to find that they come within the scope of a vague force majeure clause: as stated above, there is no general rule and the interpretation of the words used will be central.

In the event of a vaguely worded clause referencing ‘events beyond the reasonable control’ of the parties, the courts have held that if the events could be avoided by taking reasonable steps, the clause will not be engaged (see Channel Island Ferries Ltd v Sealink [1988] 1 Lloyd’s Rep 323). This arises out of straightforward contractual interpretation: an event is not ‘beyond reasonable control’ if it can be obviated by ‘reasonable steps’. However, there will be grey areas where the question as to what constitutes a reasonable step will not be obvious. This may arise in a COVID-19 context where the parties are not expressly prohibited by an act of government or the restrictions of the pandemic in carrying out a contractual obligation but face other obstacles to performance. The fact that performance has become more difficult by virtue of increased expense or delay is unlikely to be enough, in this sense performance will not have been prevented but hindered. A party who is able to demonstrate that performance is impossible because it has been physically or legally prevented from performing is far more likely to be able to invoke a force majeure clause.

What of foreseeability? Will it be a defence to say that an event could have be foreseen? The answer appears to be no; in SVS Gas Supply and Trading SAS v Naftomar Shipping and Trading Co Ltd [2005] EWHC 2528 (Comm) it was held that the foreseeability of bad weather did not bar a party from relying on a force majeure clause. This reasoning is commensurate with the parties’ intention in drafting the clause, as such clauses may be designed to deal with a range of potential events regardless of whether they are foreseeable. This is unlikely to arise in COVID-19 cases unless the contract was drafted whilst the pandemic was clearly spreading.

Force Majeure in EU Law

Although not harmonised in nature, the concept of force majeure is well known under Community case-law. By way of example, force majeure was successfully utilised as a lawful excuse for non-performance of a contractual obligation in Parliament v SERS [2003] ECR I-3269 and in the interpretation of specific provisions in EU legislation providing for force majeure or equivalent conditions.

It is settled CJEU case law that the concept of force majeure does not have the same scope in the various spheres of application of Community law and that its meaning must be determined by reference to the legal context in which it is to operate.

In the package travel context Directive 90/314/EE (the ‘1990 Directive’) and Directive (EU) 2015/2302 (the ‘2015 Directive’) both provide that parties may rely on force majeure as a defence to liability in certain circumstances. The 1990 Directive defines force majeure as ‘unusual and unforeseeable circumstances beyond the control of the party by whom it is pleaded, the consequences of which could not have been avoided even if all due care had been exercised.’ In the event of such circumstances, a tour operator can seek to rely on force majeure to, amongst other things, cancel, make significant changes to a package holiday prior to departure or to avoid liability for damages caused by the failure to perform or for improper performance of the package travel contract.

The 2015 Directive contains provision for travellers and tour operators to utilise force majeure in ‘unavoidable and extraordinary circumstances’ which are defined as ‘a situation beyond the control of the party who invokes such a situation and the consequences of which could not have been avoided even if all reasonable measures had been taken’. In the context of the 2015 Directive, travellers are entitled to rely on force majeure to terminate the package travel contract and tour operators are entitled to make significant changes to the package travel contract.

Frustration

Frustration is an English law doctrine which, in certain circumstances, entitles a contract to be discharged when an unforeseen event occurs which makes performance of the contract impossible. Frustration has been recognised since Taylor v Caldwell (1863) 3 B. & S. 826, but today is widely acknowledged to be difficult to establish and the ambit of the doctrine is narrow. Bingham LJ neatly summarised this point in Lauritzen AS v Wijsmuller BV [1990] 1 Lloyd’s Rep 1, when he said that ‘since the effect of frustration is to kill the contract and discharge the parties from further liability under it, the doctrine is not to be lightly invoked, must be kept within very narrow limits and ought not to be extended’.

In order for a party to successfully establish frustration, the requirements that Lord Simon set out in National Carriers Ltd v Panalpina (Northern) Ltd [1981] A.C. 675 need to be proved. There must firstly be a supervening event which took place after the contract was concluded. Secondly, that event must significantly change the nature (not merely the expense or onerousness) of the contractual rights and/or obligations from what was reasonably contemplated by the parties at the time of contract and, finally, it must be unjust to hold the parties to the literal sense of the contract’s stipulations in the new circumstances.

A contract can be frustrated by a change to the law which makes it illegal to perform that contract. In Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119 the parties agreed that a reservoir would be constructed within six years from 1914, but in 1916 the act of the construction of the reservoir became illegal under the Defence of the Realm Act and the contract was held to be frustrated by ‘supervening illegality’ by the House of Lords. The concept of supervening illegality is potentially particularly important during the COVID-19 crisis, where the Coronavirus Act and the Health Protection (Coronavirus, Restrictions) Regulations have restricted certain activities.

A contract which has been frustrated will be brought to an end immediately. No action needs to be taken by the parties to the contract and the parties to the contract are immediately released from further performance. A contract cannot be paused or temporarily suspended by frustration. If there is a dispute as to whether a contract has been frustrated, parties can bring proceedings seeking a declaration and relief from the court.

The Law Reform (Frustrated Contracts) Act 1943 broadly provides that where a contract has been frustrated all of the sums paid or payable have to be returned to the paying party, subject to deductions for expenses incurred by the other party.

Conclusion

All parties will have to pay close attention to both the force majeure clauses in their contract and the wording and purpose of the contract as a whole if they wish to invoke such clauses successfully. Where the contract in question seeks to comply with EU or EU derived legislation parties should keep in mind the purpose of any such provisions. Ultimately, whether or not a contract is frustrated will require careful reading of the provisions of the contract and any legislation with which that contract intended to comply, and consideration of the circumstances in which it is said to be frustrated. Parties must remain mindful of the impact that force majeure and frustration have on their contracts.

 

 

 

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