Ukraine conflict: Force majeure and frustration in commercial contracts
The events in Ukraine have fundamentally altered the commercial landscape for many businesses. The realities of events on the ground, including damage to infrastructure, economic sanctions and the shock effects on the global economy and neighbouring regions, are just some of the factors that many will be following closely. Businesses with interests either in or linked to the region could find it challenging - if not impossible - to fulfil their contractual obligations.
Force majeure clauses and the doctrine of frustration may assist parties who, through circumstances beyond their control, can no longer perform their contractual obligations. This article provides an in-depth analysis of the core legal principles of force majeure and frustration and how they can apply to contracts affected by events in Ukraine and their consequences.
Force Majeure
1 What is force majeure?
Unlike many civil law systems, English law provides no universal concept or definition of force majeure, which instead operates only to the extent contractually agreed. For this reason, the ability of a party to invoke force majeure (and the effect this will have on the contract in question) will depend on the existence of a force majeure clause and its particular terms.
A typical force majeure clause sets out the circumstances (generally involving an unforeseen supervening event) where one or both parties are excused from performing, or are entitled to suspend, their contractual obligations, commonly by reference to a list of trigger events. A force majeure clause may even outline circumstances in which a contract is cancelled automatically on the occurrence of an event.1 Usually, a force majeure clause will also outline the contractual consequences that will follow where the clause is triggered. The clause itself will often prescribe a procedure that the parties must follow to avoid liability for non-performance on the occurrence of a trigger event.
Although every clause will vary and should therefore be carefully considered on its own terms, there are various common elements of force majeure clauses, as set out below.
2 Common elements of force majeure
The onus is on the party relying on the clause to demonstrate that it has been engaged in the particular factual circumstances.2
Occurrence of event
As a starting point, the party relying upon force majeure will need to establish that one of the prescribed events in the force majeure clause (if so drafted) has occurred. Generally, the mere anticipation of an event occurring will not trigger a force majeure clause.3
In this context, for example, a party not currently affected by sanctions would not usually be able to trigger a force majeure clause in the expectation that sanctions which could affect the performance of the contract are likely to be imposed.
Typically, specific trigger events such as war, natural disaster or acts of god will be included in a force majeure clause.
It is not uncommon for the threat or preparation of war, armed conflict, and the breaking off of diplomatic relations to be included as a trigger event, which (depending on the nature of the contract) could encompass current events in Ukraine. Clauses may also specifically list the imposition of embargoes, sanctions, or a change in law or compliance with government legislation as a trigger event. This would potentially cover the consequences flowing from the political and legislative responses to the events in the region. Other trigger events such as chemical or nuclear contamination, the collapse of buildings, fire, explosion or accident could address accidental or deliberate consequences of armed conflict.
The list of prescribed triggers is frequently followed by catch-all wording such as "or any other cause beyond the parties’ control." Language of this nature will be given its natural and larger meaning and should not generally limit the "other" qualifying events to only those that are similar to the ones listed in the clause. Instead, the court will generally ask what the parties to a commercial contract intended.4
However, the court held in Tandrin that an unforeseen downward spiral in the world’s financial markets did not trigger a force majeure clause, despite the presence of catch-all wording.5 The court held that the phrase should be read in the context of the entire clause, and that because none of the prescribed events that preceded the catch-all wording were "even remotely connected" with the economic downturn, the clause was not triggered.
As a starting point, a party seeking to rely on a force majeure clause should consider whether it can rely on any specified trigger event within the clause. In circumstances where the party seeks to rely on a "catch-all" provision, it should assess the relationship of the catch-all to the preceding trigger events. For example, if the relevant event relied on by the party is the imposition of sanctions, but sanctions are not listed as a specific trigger event, the relying party should demonstrate that the imposition of sanctions bears a connection to the preceding listed events in the clause.
Explicit wording will be required to relieve a party from contractual obligations where they have simply become uneconomical or "commercially unacceptable or impracticable".6 Accordingly, parties will be unable to call force majeure on the basis of a general economic or market downturn unless the force majeure clause includes express wording to that effect.
This may be of particular relevance to counterparties with no direct nexus to the events in Ukraine, but where their contract relates to matters directly affected by those events, for example, a commercial arrangement that relies heavily on the availability of natural gas.
Although many businesses may struggle to fulfil their contractual obligations due to the increased cost of doing so, a change in economic or market circumstances that make fulfilling the contract less profitable, desirable or expensive to perform will generally not be a valid ground for declaring force majeure.7
Impact on performance
Having established that a trigger event has occurred, the party seeking to rely on the force majeure clause must also show that the event has had the necessary impact on their ability to perform their obligations to the necessary degree. A force majeure clause will normally require that the event has "prevented", "hindered", "delayed" or "impeded" performance. The Court of Appeal has held that the proper approach to interpretation here is by reference to the words used by the parties, rather than the parties’ intentions.8
Where there is a requirement for the event to have "prevented" performance, the defaulting party will need to demonstrate that it has become physically or legally impossible to perform their obligations, and not merely more difficult or unprofitable.9 This means a party will still be required to fulfil their obligations via any available alternative means, including, for example, by sourcing goods from another supplier, even if at a substantially greater cost.10 The court will, however, consider "prevented" force majeure clauses within the wider context of the contract.
For example, if the imposition of embargoes prevents an intended method of performance under the contract, but the party is still able to effect performance by other means, the court would need to determine whether the intended performance had been "prevented" under the terms of the force majeure clause. This is a question of fact and construction.11 Where embargoes are not absolute, the relying party may be required to prove that the performance of the obligation would not have constituted one of the exemptions to the embargo.12
Similarly, even if the clause does not specify that the event must have prevented performance, but provides that a party’s obligations are to be "excused" on the occurrence of an event, that party must still demonstrate that performance has become impossible (effectively, that the party has been prevented from performing its obligations).13
Greater leeway is given where the clause refers to a party’s obligations being "hindered", which requires performance being substantially more difficult, rather than impossible. This may be satisfied where complying with the contract would cause a party to dislocate their business and break other contracts.14 Similarly, the interpretation of the word "impeded" in a force majeure clause will usually be considered by a court as equivalent to "hindered", depending on the context.15
Additionally, provision may be made for circumstances where performance is "delayed", and a party may be granted additional time to perform its obligations under the force majeure clause. Circumstances hindering performance may amount to delay.16
As noted above, an increase in the cost of performing the contract will generally not be enough to satisfy a requirement that performance has been prevented, hindered or delayed by the relevant event.
Sole cause
As regards the necessary extent of the causal link between the force majeure event and a party’s inability to perform their contractual obligations, the relying party must typically demonstrate that the event is the sole and operative cause of the impediment.17 It is common for a force majeure clause to contain a causation requirement.
Where there are two events that have (on a common-sense view) "caused" the non-performance, one of which is not an event envisaged by the clause (but the other is), it will not be possible to call force majeure; the force majeure event must be the sole cause.18
Causation is likely to be a heavily disputed factor. If a party was already facing issues that would impact their obligations, it may be difficult to prove that the force majeure event was the sole cause.
This may present problems in supply contracts where a business was facing difficulty before the start of current events in Ukraine. Declaring force majeure on a supply contract may be challenging in circumstances where the supply of goods was already affected by factors which pre-date the events in Ukraine (such as supply chain backlogs due to the effects of COVID-19).
Mitigation
Force majeure clauses will commonly require a party to prevent or mitigate the effects of the trigger event, for example by imposing a duty to use all reasonable endeavours to do so. A clause may even impose an express obligation on the parties to "circumvent, or overcome the circumstances of the force majeure".19 A force majeure clause which refers to events "beyond the control of the relevant party" can only be relied upon if the affected party has taken all reasonable steps to avoid the operation of the event or to mitigate its result.20 What constitutes reasonable endeavours is fact-specific and will vary depending on the type of business and the surrounding circumstances.
As the events in Ukraine develop, examples of reasonable mitigation measures could include:
(a) sourcing alternative suppliers outside of the region and/or not subject to sanctions. This could, for example, apply to businesses in the automobile sector, which source components for their products from the affected region;
(b) planning and implementing new delivery arrangements to protect supply chains;
(c) sourcing alternative energy suppliers; and
(d) protecting key sites and infrastructure wherever possible or making re-location arrangements.
Even where mitigation is not expressly required by the force majeure clause, parties should take reasonable steps to minimise their losses, as English courts will not look favourably on a party that makes no attempt to do so.
Contractual consequences
The consequences of a party validly calling force majeure will depend on the wording of the clause. The clause may entitle a party to suspend or extend time for performance, or allow for termination of the contract. It is common for a force majeure clause to allow suspension of obligations for a certain period of time, after which one or both of the parties have the option to terminate the contract.
In addition, force majeure clauses often include notice or other procedural requirements that must be complied with. A party seeking to rely on a force majeure clause should carefully consider the notice requirements in the contract. If the trigger event could make the compliance with notice requirements more cumbersome, the relying party should carefully consider and additional steps it can take to comply with those requirements.
In particular, some contracts include a time bar providing that notice must be given within a specified period from when the affected party first became aware of the force majeure event. Similarly, where a party has the right to terminate the contract, careful regard must be had to the applicable termination provisions in the contract.
In the context of the events in Ukraine, consideration should also be given as to when the party first became aware of the trigger event. For example, if the party is seeking to rely on the "threat or preparation of war" as a trigger event, the timing of when such a threat materialised is likely to be subject to some debate. The relying party should clearly set out when it became aware of the force majeure event in the notice communication.
Frustration
3 What is frustration?
In the absence of a force majeure clause, or where a force majeure clause cannot be relied on, contracting parties may consider relying on the common-law doctrine of frustration. Frustration discharges a contract where an event occurs that renders it physically, legally or commercially impossible to perform, or transforms the obligation to perform into one radically different than envisaged at the time of contracting ("it was not this that I promised to do"21).
Frustration is a narrow doctrine that is applied strictly by the courts to prevent parties from using it to escape a bad bargain. Frustration cannot generally be invoked if the causal event is catered for in the contract, usually by way of an applicable force majeure clause.
4 Elements of frustration
The test
Frustration applies only in extreme scenarios and the threshold for establishing that a contract is frustrated is very high. Although there is no definitive test for frustration, and the court has held that the doctrine should remain flexible,22 generally, a contract may be frustrated where:
(a) the frustrating event occurs after the contract has been formed;
(b) the event is beyond what was contemplated by the parties on entering the contract and is so fundamental that it strikes the root of the contract;
(c) neither party is at fault; and
(d) the event renders performance of the contract impossible, illegal or radically different from that contemplated by the parties at the time they entered into the contract.
For frustration to occur, it must be demonstrated that the event affects the main purpose of the contract.23 The main purpose of a contract is often held to be narrow, and may be capable of fulfilment even where several important elements can no longer be delivered. Where a non-trivial part of the contracted performance can still be performed, the contract will be held not to have been frustrated.24
The application of the doctrine of frustration is highly fact-specific and,as a starting point, is dependent on the construction of the obligations in the contract, its nature and the surrounding circumstances in which it was made.25 All relevant factors will be taken into account by the court when considering whether a frustrating event has occurred.
Events
Types of events that have been to held to frustrate a contract include war, supervening illegality of performance, incapacity or death, cancellation of an event, a change in law, destruction of subject matter or an abnormal delay.
An increase in hardship or financial loss in performing the contract, however, will not amount to frustration.26 Certain types of contracts, such as charterparties and contracts for the sale and carriage of goods, may be more susceptible to frustration on the occurrence of a specified event that clearly makes performance impossible.
Circumstances such as the events in Ukraine could be considered a frustrating event. In practice, however, the consequences that flow from it are more likely to qualify as a frustrating event, such as:
(e) sanctions (primary, secondary and retaliatory) which may make the very performance of contractual obligations illegal. The courts have previously held that a frustrating event occurred where the outbreak of war had made the performance of an export contract illegal;27
(f) travel restrictions (including bi-lateral bans on air travel or potential closures in airspace), making the transport of goods illegal or impossible; and
(g) the potential destruction or disablement of key infrastructure and communication lines.
Beyond contemplation
Frustration requires that the supervening event was unforeseeable. If the supervening event was in some way contemplated at the time of contracting, it is more likely that the parties will have impliedly taken account of (and allocated) the risk that it would occur when contracting. This could, for example affect contracts executed during the build-up of international tensions around Ukraine.
Even if parties have not expressly provided for an event, they may still be held to have foreseen it, which will usually prevent reliance on frustration. The courts will take into account all factors when considering the parties’ knowledge, expectations and assumptions regarding the risk that a particular event might occur at the time of contracting.28
Impossibility
Generally, to prove that a contract has been frustrated, performance of contractual obligations must be shown to be genuinely impossible. It is not enough that obligations have become extremely difficult, even if they would result in devastating hardship on a party. If any manner of performance remains an option, this must be taken, regardless of the burden it would inflict on the party.
5 Consequences of frustration
Where frustration is successfully invoked, the contract is automatically terminated and all parties are released from their obligations. As the contract is terminated immediately, the parties are not restored to their pre-contractual position. This may result in an unfair or uncommercial outcome. If the Law Reform (Frustrated Contracts) Act 1942 does not apply, then money paid before the frustrating event is only recoverable where there has been total failure of consideration.29
The Act applies to commercial contracts, with the exception of contracts that have expressly excluded it. Certain shipping, insurance and perishable goods contracts also fall outside the scope of the Act.
Where the Act applies, money paid before the frustrating event can be recovered and unpaid sums that are due cease to be payable.
A party may also be able to retain an amount of the money paid to cover incurred expenses. Additionally, the court may require a party to pay a just sum for a valuable benefit received under the contract.
6 Relationship with force majeure
Where a contract contains a force majeure clause, it is unlikely that the parties will be able to argue frustration if the force majeure clause addresses the specified event. This is because the doctrine of frustration is applied narrowly, and the parties will be viewed as having already made express provision for the consequences of a particular supervening event in the contract itself; the court will, as a starting point, look to the contract to see if the parties have provided for the situation that has arisen.30
However, because force majeure clauses are viewed in a restrictive way, the courts will need to be satisfied that the wording of the force majeure clause covering the event is "full and complete" before concluding that frustration is not applicable.31 If complete provision is made for the precise scenario that has occurred, the parties will not be able to rely on frustration.
7 Conclusion
Force majeure and frustration, where applicable, both provide relief for parties who. Through no fault of their own. can no longer perform their contractual obligations. However, they are concepts that are applied restrictively by the English courts.
Force majeure clauses are likely to provide a more appropriate and pragmatic solution to the issues posed by the supervening event, as the terms will have been negotiated by the parties.
By contrast, frustration sets a higher threshold to relief and its consequences are automatic. Accordingly, parties should review their contracts carefully for any applicable force majeure provisions before considering arguing frustration, which is often viewed as a remedy of last resort.
In either case, given the severity of the potential commercial consequences where a party wrongfully declares force majeure or frustration (including termination of the contract by the other party and a damages claim for repudiatory breach), any contractor considering taking these drastic options should tread carefully and take appropriate legal advice, especially in such volatile times as these.
1 Continental Grain Export Corp v S.T.M. Grain Ltd [1979] 2 Lloyd’s Rep. 460
2 Channel Island Ferries Ltd v Sealink UK Ltd [1998] 1 Lloyd’s Rep 323
3 Hackney BC v Doré [1922] 1 K.B. 431
4 Chandris v Isbrandtsen-Moller Co Inc [1951] 1 KB 240.
5 Tandrin (Tandrin Aviation Holdings Ltd) v Aero Toy Store LLC [2010] 2 Lloyd’s Rep 668
6 Thames Valley Power Limited v Total Gas & Power Limited [2005] EWHC 2208
7 Tennants (Lancashire) Ltd v G S Wilson & Co Ltd [1917] AC 485
8 Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (No 2) (The Marine Star) [1996] 2 Lloyd’s Rep 383
9Tennants
10Hoecheong Products Co Ltd v Cargill Hong Kong Ltd [1995] 1 WLR 404
11Tradax Export SA v Andre et Cie [1976] 1 Lloyd’s Rep. 416
12Tradax; see Chity on Contracts 24th Ed. 26-075
13P.J van der Zijden Wildhandel NV v Tucker & Cross Ltd [1975] 2 Lloyd’s Rep 240
14Tennants
15Chity on Contracts 24th Ed. 26-077
16Re Lockie and Craggs (1901) 86 L.T. 388
17Intertradex SA v Lesieur [1978] 2 Lloyd's Reports 509
18Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] 1 All ER (Comm) 34
19Seadrill Ghana Operations
20Channel Island Ferries Ltd v Sealink UK Ltd [1988] 1 Lloyd’s Rep 323
21Davis Contractors Ltd v Fareham UDC [1956] AC 696
22National Carriers Ltd v Panalpina (Northern) Ltd [1981] A.C. 675
23Denny Mott & Dickson Ltd v James Fraser & Co Ltd [1944] AC 265
24Leiston Gas Co v Leiston-cum-Sizewell UDC [1916] 2 K.B. 428
25Davis Contractors Ltd v Fareham UDC [1956] AC 696; Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch)
26Tsakiroglou v Noblee Thorl [1962] AC 93
27Denny Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] A.C.265
28Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel) [2007] 2 Lloyd’s Rep 517
29Chandler v Webster [1904] 1 KB 493
30The Eugenia [1964] 2 Q.B.; Bank Line Ltd v Arthur Capel [1919] AC 435
31Bank Line Ltd v Arthur Capel & Co [1919] AC 435
