Professor Ewan McKendrick University of Oxford SETTING THE SCENE - - PowerPoint PPT Presentation

THE IMPACT OF COVID-19: FRUSTRATION, FORCE MAJEURE, HARDSHIP AND DEALING WITH UNCERTAINTY

Professor Ewan McKendrick University of Oxford

SETTING THE SCENE

• Contracts entered into in 2019
• Contracts entered into in January or February

2020

• Contracts entered into in March 2020 or

thereafter

• The response of the Chinese authorities –

issuing force majeure notices

• The Cabinet Office response – encouraging co-
• peration

• A doctrine which operates within narrow limits
• Contract not frustrated if provision made for event in the

contract itself

• Subsequent impossibility
• Subsequent illegality
• Performance radically different from that which was in

the contemplation of the parties at the time of entry into the contract

• Not an escape route from a bad bargain
• Drastic consequences of its invocation
• Doctrine only open to review by the Supreme Court

FRUSTRATION: INTRODUCTION

SUBSEQUENT ILLEGALITY

• Focus here is on what the law requires, not on

government guidance which does not have the force of law

• Illegality as a matter of English law, not foreign law
• Which has had the effect of removing all or substantially

all of the benefit that one party receives from the performance of the contract

• Fact that illegality is foreseeable is irrelevant
• Cannot make express provision for subsequent illegality
• Heavy public policy influence
• Contrast discretionary approach in Patel v Mirza

• Impossibility, not impracticality
• Not sufficient that performance has become

prohibitively expensive

• A partial failure of supplies will not suffice –

failure must be total so that performance is impossible: Super Servant II

• Impossibility must not be attributable to fault of

either party

• Must not have been foreseeable

IMPOSSIBILITY

DELAY

• Delay must be abnormal
• Outside what the parties could have

reasonably contemplated at the time of entry into the contract

• Prospective not retrospective
• Compare length of delay to duration of

contract

EFFECTS OF FRUSTRATION

• Automatic discharge of the contract
• Discharge prospective, not retrospective
• Law Reform (Frustrated Contracts) Act 1943
• Reverse unjust enrichments but not loss

apportionment

• Sums paid before discharge recoverable, sums

due cease to be payable - allowance for expenses

• Non monetary benefits – if there is a valuable

benefit may be required to pay a just sum

FORCE MAJEURE CLAUSES INTRODUCTION

• Force majeure not a legal doctrine in

English law – compare French law

• A contract term
• Important to examine the content of the

term – be careful with ‘boilerplate’ clauses

• The function of the clause (i) shield from

liability in damages, (ii) suspension of the contract, (iii) termination of the contract

INTERPRETATION OF FORCE MAJEURE CLAUSES

• Approach to construction – need for clear words
• Contra proferentem rule – unlikely to apply
• Burden of proof
• Must the event be unforseeable?
• The specific events – pandemic or epidemic –

government action - embargo

• What is the value of the list?
• Examine the nature of the events – is there a

link between them?

THE ‘WRAP UP’ PROVISION

• The general wrap-up provision (‘similar

events which reasonably may impede, prevent or delay the performance of this contract’)

• Does the ejusdem generis rule apply?
• If it does, can it be excluded?
• Why insert a ‘wrap up’ provision of this

type?

BEYOND THE (REASONABLE) CONTROL OF THE PARTIES

• Must the event be beyond the control of

the parties?

• As a matter of implication
• As a result of an express term of the

contract

• Is there a difference between ‘control’ and

‘reasonable control’?

CHANGE IN ECONOMIC CIRCUMSTANCES

• Can a party for whom performance has become

significantly more expensive rely on a force majeure clause?

• Depends on the wording
• ‘If either party is by reason of force majeure

rendered unable wholly or in part to carry out its

• bligations under this agreement then…
• ‘prevent’ ‘hinder’ or ‘impede’ performance

THE CAUSAL LINK

• Generally the force majeure event must be the

cause of the non-performance

• But what of the case where the party seeking to

rely on the clause would not have been able to perform in any event?

• May be irrelevant where the party is relying on

the clause solely to bring about its prospective discharge

• But may be very relevant where reliance is

placed on the clause in order to shield a party from liability in damages

NOTIFICATION OBLIGATIONS

• Is there a contractual requirement to give

notice of the occurrence of a force majeure event?

• Is the giving of notice a condition

precedent to reliance upon the clause?

• Remedies for non-compliance?
• When must notice be given?
• What form must the notice take?

THE EFFECT OF THE CLAUSE

• Shield the party relying on the clause from

liability in damages

• Enable a party to suspend performance of the

contract for the duration of the force majeure event

• Entitle the party relying on the clause to

terminate the contract

• Bring about the automatic termination of the

contract

• Depends on the drafting of the contract

• What amounts to ‘hardship’
• Is the clause enforceable or is it an agreement to agree?
• Likely to be used where wish to be able to adapt the

contract because of changed circumstances

• Can the parties be required to re-negotiate the terms of

their contract to restore the equilibrium of the contract?

• If the parties refuse to do so or the renegotiation is

unsuccessful, what remedies are available?

• Will the court adapt the contract or is the only remedy
• ne in damages?
• Is there a difference between litigation and arbitration?

HARDSHIP CLAUSES

MATERIAL ADVERSE CHANGE CLAUSES

• Loan agreements and financial contracts
• What is a ‘material’ adverse change?
• What are the consequences of reliance

upon the clause?

• Why rely on such a clause?
• When will it be used in preference to a

force majeure clause?

DEALING WITH UNCERTAINTY

• What provision can you make for the impact of

COVID-19 on you or your clients’ contractual

• bligations?
• Is the aim to shield from liability in damages?
• Is the aim to adapt the contract to changed

circumstances

• Is termination the preferred option? If so, can

the termination event be identified with sufficient precision?

DEALING WITH UNCERTAINTY

• The problem of long term contracts
• Move towards short term contracts?
• Preserving flexibility
• But avoid drafting agreements to agree

which are unenforceable