Coronavirus: A force to be reckoned with?
InsightsThe pandemic of Coronavirus is already having dramatic impact on our everyday lives but also on all businesses of all sizes.
First published on Whichfranchise.com
The global coronavirus pandemic is going to make it difficult or impossible for franchisors and franchisees in a wide range of circumstances to fulfil their contractual obligations. It is likely that many such parties will seek to argue that they should be released from those obligations by virtue of a force majeure clause or under the doctrine of frustration.
Although they are often confused, frustration and force majeure are two distinct principles. Force majeure is not a stand-alone concept in English law but many contracts will incorporate it by way of a force majeure clause. In the absence of a force majeure clause, the parties will not be able to rely on force majeure but may be able to invoke the common law doctrine of frustration.
Force majeure
When a party is faced with an impossible situation preventing them from performing their contractual obligations, they should first review the terms of the contract to see if it contains a force majeure clause. Whether a party may be released from their obligations under a contract as a result of a force majeure event will be determined by the wording of the force majeure clause, which will be interpreted in accordance with usual contractual principles. The burden of proof will be on the party seeking to rely on the force majeure clause.
Force majeure is a term taken from the French system and is not a recognised term in English law. As such a clause that just provides for a party to escape its obligations in the event of a force majeure event with no further definition or specificity may not have any force. For the most part, however, a force majeure clause will specify particular events or types of events which the clause is intended to cover. Although each case will turn on its own facts, there are a number of general points to consider when reviewing a force majeure clause:
Doctrine of Frustration
In the absence of a force majeure clause, a party may still avoid liability for failure to perform its obligations by invoking the doctrine of frustration. The doctrine of frustration applies when performance of a contract is rendered impossible by a supervening event for which neither party can be held responsible. The contract is automatically discharged when that event occurs and the parties are no longer bound by their obligations.
The doctrine of frustration was first established in the case of Taylor – v- Caldwell (1863) in which a contract was held to be frustrated after fire destroyed a music hall which had been booked for a number of concerts. The scope of the doctrine has developed over time to cover a wide range of circumstances where performance of a contract is rendered impossible. Contracts may be frustrated because:
In order for a contract to be frustrated:
Frustration is a common law principle which is applied on a case-by-case basis taking into account all of the circumstances, in particular the wording of the contract. Examples of the types of event which have previously been held to have frustrated contracts and which may apply in present circumstances, are:
Supervening illegality:
Cancellation of an expected event:
Illness/incapacity:
Invoking Frustration
If you are considering invoking the doctrine of frustration, you should bear in mind:
Effect of Frustration
If a contract is frustrated then it is automatically discharged and the parties are released from future obligations. If the entirety of the contract is yet to be performed the outcome is relatively simple. Many contracts will, however, have been part-performed. Under the common law, the loss would lie where it fell but as this can lead to unsatisfactory results, the Law Reform (Frustrated) Contracts Act 1947 (the LRA) steps in to allocate loss.
The LRA applies to many commercial contracts but there are specific exceptions for contracts relating to shipping, insurance and perishable goods. The LRA will also not apply where the parties have agreed to exclude its application. It is therefore important to check the legislation and the contract to ensure that the LRA applies.
Generally speaking, where the LRA does apply to the contract, payment that has been made in advance will be recoverable. Any recovery could, however, be less any expenses paid by the performing party if the court exercises its discretion to allow these to be retained. The court also has discretion to order any party who has gained a valuable benefit under the contract to pay a ‘just’ sum for that benefit.
If the LRA does not apply to the contract then the fall-back position is the common law. Under the common law, if there has been a complete failure of consideration then a party may recover any payment made but if there has been partial consideration then payments will not be recoverable. Similarly, the party who has rendered part performance will not be able to recover any expenses they have expended performing or preparing to perform the contract.
Summary
We expect there will be a wealth of cases relying on either frustration or force majeure or a mixture of the two as a result of the pandemic. As above, the wording of the contract is key and we recommend checking yours without delay. If you require any advice, or would like us to review your contracts, please contact a member of the Franchising team and Dispute Resolution team.
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