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” Owing to the outbreak of hostilities it is now quite evident that the delivery of the machines on order … cannot take place. Under the circumstances we shall be obliged if you will kindly arrange to return our initial payment … at your early convenience.”
So wrote the agents of the Eastern European buyers of machinery to the UK based sellers some seven days after the buyers’ country had been invaded.
The sellers refused. This was not the invasion of Ukraine in 2022 but the German invasion of Poland in 1939. Nothing changes. In that event further performance of the contract was impossible due to the war and question was whether the Polish buyers could recover the earlier payment (eventually held that they could)[1].
The invasion of Ukraine is likely to directly or indirectly impact on the performance of many contracts. War, whether declared or not, may directly or indirectly prevent contractual performance. There may also be a ripple effect with sanctions, legal obstacles, cyber attacks and market issues that flow out from hostilities that may impact on contract performance.
What is the legal situation in such circumstances, where does risk lie and what remedies might be available? In this article we look briefly at the legal landscape and legal routes that might apply where the performance of contracts subject to English law is prevented by circumstances flowing out of hostilities.
Two routes – operation of law or application of contract terms
Where issues arise that affect performance of a contract the parties’ obligations may be governed either by operation of law or under the terms of the applicable contract. We consider each of these below.
Operation of law – Frustration of contract
Does the law operate to relieve or suspend contractual obligations if circumstances make performance impossible or economically unviable? English law has historically required parties to perform their contractual obligations but where unforeseen circumstances arise to render performance of impossible it may be considered “frustrated”.
The result is that the contract is considered as being at an end and the parties discharged from any further performance obligations. In the words of one judge[2]:
“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.“
This doctrine has its origin in the case of Taylor v Caldwell[3]. The parties contracted for the use of a music hall but the hall burnt down before it could be used thus rendering the contemplated performance of the contract impossible. The contract was held to be frustrated and the parties discharged from further obligations.
Examples of circumstances giving rise to frustration in the past include destruction of the subject matter and supervening illegality[4]. The case of the Polish buyers[5] referred to at the beginning of this article was another example of frustration.
Frustration is limited in its application. Thus:
- Frustration does not arise merely if changed circumstances make a contract more onerous to perform[6].
In the words of one judge[7]: “The appellants were undoubtedly put to considerable expense and inconvenience. But that is not enough”.
- Frustration does not apply on a temporary basis to merely suspend a contract. If frustration applies then it ends the contract permanently. This may be contrasted with the effect of Force Majeure clauses considered below where a contract may continue whilst the obligation to perform is suspended or qualified.
Frustration thus may not be applicable in many cases where the impact of hostilities on contractual performance falls short of rendering it impossible.
Where a contract is frustrated the rather prosaically named Law Reform (Frustrated Contracts) Act 1943 establishes a statutory framework to deal with payments made and work done prior to frustration. Charter parties and contracts of insurance are excluded from this Act.
Other than in the limited cases when a contract is frustrated English law is not generous in providing legal solutions to events impacting on contract performance. English law (unlike some other legal systems) does not recognise Force Majeure as a legal concept and this term has no technical legal meaning. It is relevant only in the context of contractual provisions referred to later.
Likewise English law does not assist where there is a material change of circumstances that adversely affect the parties if the contract is still possible to perform and not considered frustrated.
Contract clauses where performance is affected by hostilities
The occasions when a contract is considered frustrated may be limited. Outside frustration what of the contract terms? Contract terms will, of course, vary considerably and reference to the name used for any particular type of clause may not be helpful. Much will depend on the wording and its construction. However some broad areas of coverage may be identified:
- clauses suspending or qualifying present obligations going forward.
- clauses excluding liabilities arising out of past performance.
- clauses concerned with the effect of an event upon a contract for the future.
- clauses giving a right of termination.
Clauses suspending or qualifying obligations – Force Majeure
It is common for commercial contracts to include a clause suspending or qualifying the parties’ present obligations if certain “Force Majeure” events arise. As mentioned previously force majeure as such is not a legal concept recognised under English law but the name if commonly used for such contract terms.
This type of clause intended to address the parties’ further obligations on the arising of certain events. The contract is thus usually considered as (at least initially) continuing with the clause merely modifying or suspending obligations.
A typical force majeure clause (a) lists a number of event or causes beyond the control of the parties (“Force Majeure” events), (b) defines the effect such events much at have to apply and (c) the consequences on the parties obligation if that occurs.
“Force Majeure” events listed tend to divide into (a) natural disasters and (b) man made events that include war and “restraint of princes” or act of government. Hitherto cyber attacks do not seem to feature as express events listed in typical wording.
One important point is that unless otherwise stated in the wording a change in economic circumstances will not alone be considered as a Force Majeure event. As stated in one case[8] it is:
“well established under English law that a change in economic/market circumstances, affecting the profitability of a contract or the ease with which the parties’ obligations can be performed is not regarded as being a force majeure event“
And again[9]
” … It does not at all follow that the supplier is entitled to rely upon an increase in the market price in comparison to the contract price as a force majeure circumstance. ……… This conclusion is consistent with a line of cases, both on force majeure clauses and on frustration, ….., to the effect that the fact that a contract has become expensive to perform, even dramatically more expensive, is not a ground to relieve a party on the grounds of force majeure or frustration.“
Force Majeure clauses typically require an affected party to give notice to the other contract party for the clause to be activated.
Clauses excluding liabilities arising out of past performance – Exceptions clauses
Exceptions clauses exclude or limit liability for specified past breaches of contract at a time when the contract remained in existence and was the source of contractual obligations. As such they are different from Force Majeure clauses that cover present performance.
Clauses concerned with the effect of an event upon the future of the contract
Another type of clause is one that expressly addresses the effect of frustrating events on future performance and operates to end the contract and the obligations of the parties.
Termination clauses
Most commercial agreements include a clause giving a right to terminate triggered by certain named events. Such termination clauses may include a right to terminate in the event of war or other hostilities as defined. Such provisions may merely trigger a right that has to be exercised rather than a termination that arises automatically if an event occurs. Such events may include the continuation of a force majeure event for more than a stated period thus linking this to any force majeure provisions as referred to above.
Ready willing and able to perform – a precondition?
One further question for consideration is whether any contractual provisions that excuse a party from performance are subject to a precondition that the party concerned was otherwise ready willing and able to perform its obligations. This has been called the “but for” test i.e. whether it was necessary for a party to prove that, but for the force majeure or frustrating event, it could and would have performed the contract in accordance with its terms. Whether this applies in any given case will depend on the wording of the clause concerned. It is, however, a point that may invite consideration.
Where contract terms are concerned there is no one answer. These comments are merely indicative of the ground that may be covered by any contract terms. As mentioned previously much depends on the precise contract wording.
Sources
[1] Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] UKHL 4
[2] Lord Simon in National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675
[3] [1863] EWHC QB
[4] Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265 where regulations passed in connection with the war made performance illegal.
[5] Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] UKHL 4
[6] Davis Contractors Ltd v Fareham Urban District Council [1956] UKHL 3
[7] National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675
[8] Tandrin Aviation Holdings Ltd v Aero Toy Store [2010]
[9] Thames Valley Power Ltd. v. Total Gas & Power Ltd. [2006] 1 Lloyd’s Rep. 441
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