Force Majeure and Frustration of Contract

Ewan McKendrick

• Publisher: Informa Law from Routledge
• Year: 2013
• ISBN:
  9781317908807
• Edition: 2
• Topic: Jura
• Subtopic: Handelsrecht

This updated edition includes an examination of force majeure in French law, the drafting of force majeure clauses, its usage in shipbuilding contracts, and the application of commercial impracticality under article 2-165 of the Uniform Commercial Code.

PART I

FORGE MAJEURE AND FRUSTRATION: INTRODUCTION AND INTERRELATIONSHIP

CHAPTER 1

THE JUDICIAL CONSTRUCTION OF FORCE MAJEURE CLAUSES

1. INTRODUCTION

The common law of contract proceeds from the basis that liability for non-performance of contractual obligations is strict. Apart from those cases where the promise is to provide personal services, where the presumption is that the promisor undertakes only to exercise reasonable care in performing his or her duties under the contract,¹ failure to bring about the state of affairs promised in the contract will, without more, amount to a breach of contract and give rise to a claim for damages. The rationale for such a rule was given by the Court of King’s Bench as long ago as 1647 in Paradine v. Jane:² “When the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract.”³

Proof of breach is not dependent on the promisee showing that the promisor was in some way at fault in failing to perform as promised.⁴ As Lord Edmund-Davies said in Raineri v. Miles⁵: “It is axiomatic that, in relation to claims for damages for breach of contract, it is, in general, immaterial why the defendant failed to fulfil his obligation, and certainly no defence to plead that he had done his best.” By contrast, the law of tort generally finds a defendant liable to compensate another for harm that he has caused only where the victim shows that the defendant was in some way at fault in causing that harm. Where the defendant’s conduct is not shown to have fallen below a certain standard, generally that of the reasonable man, he will not be called upon to compensate the plaintiff for the harm which he has inflicted. The rationale for this distinction rests in the source of the different obligations. Contractual obligations, unlike tortious duties, are freely assumed⁶: if the promisor wants in some way to limit his obligation then he is free to do so; if he chooses not to he bears the risk of non-performance. Such a proposition, which would seem to penalise a promisor for failing to perform the impossible, is easier to accept if we view a contractual promise not as a promise to perform but as a promise to bear the risk of the promised event not coming to pass.⁷ The point is well put by Holmes⁸ when he says:

“An assurance that it will rain tomorrow, or that a third person shall paint a picture, may as well be promised as one that the promisee shall receive from some source one hundred bales of cotton, or that the promisor shall pay the promisee one hundred dollars.”

“… the law does not inquire … how far the accomplishment of an assurance touching the future is within the power of the promisor … In the case of a binding promise that it shall rain tomorrow, the immediate legal effect of what the promisor does is, that he takes the risk of the event … as between himself and the promisee. He does no more when he promises to deliver a bale of cotton.”⁹

It is this ability to allocate risks which provides a major function of the law of contract: it enables individuals and corporations to plan for the future with a moderate degree of certainty and hence to maximise their freedom of action. Secure in the knowledge that contractual obligations will be performed or compensation given if they are not, a promisee is free to turn his or her attention to some other transaction. Under a standard building contract, for example, the main contractor will subcontract various parts of the task to specialist contractors. Having entered into a binding contract for the installation of the floors of the building he is able to turn his attention to finding someone to provide the roof and so on. Then when the subcontracting process is complete he can turn his attention to another project. And it matters not that the agreements entered into might at any stage be wholly executory: an executory promise is just as effective as an executed one. If it were not possible to both give and receive binding promises any ability to plan for the future by the contractual allocation of risk would be denied.¹⁰

It may be, however, that a promisor does not wish to assume such an absolute risk and he is free to delimit the extent of the obligation in any way he chooses, subject, of course, to the agreement of the promisee and to mandatory rules of law. As we have already seen, the justification given in Paradine v. Jane for the imposition of strict liability in contract was that the promisor could have limited his obligation by agreement if he had so wished.¹¹ In many cases the promisor may be especially unwilling to accept the risk of events over which he has no control and a contract may typically provide that “the promisor shall not be responsible for any losses occasioned by any Act of God, strike, lockout, riot or civil commotion, combination of workmen, breakdown of machinery, fire or any cause contemplated in the term force majeure…”. Such clauses are known generally as force majeure clauses. In this chapter we will be concerned with the judicial interpretation of such clauses. It should be pointed out, however, that force majeure clauses come in a multitude of forms and, as with all contractual terms, each must be read in the context of the contract as a whole. No definitive answers can therefore be given but some light may be shed by the enquiry as to their treatment by the courts, most especially whether they are subject to the same restrictive interpretation as exception clauses.

To complete the picture, reference must also be made to the doctrine of frustration.¹² Since Paradme v. Jane, the common law has, in certain limited circumstances, relieved a promisor from liability for failure to bring about the promised state of affairs.¹³ The doctrine of frustration, which excuses non-performance where “a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract”,¹⁴ operates even though the terms of the contract are prima facie absolute. But such a doctrine, by relieving a promisor from liability for non-performance, subverts the forward-planning element of contract law outlined above and places the risk of future non-performance on the promisee.¹⁵ It is not surprising, therefore, to find that judges are nowadays generally reluctant to find that a particular contract has been frustrated.¹⁶ A force majeure clause, on the other hand, seeks to anticipate such eventualities and settle the allocation of risks beforehand in an agreed, rather than an imposed, manner. For that reason, force majeure clauses are common elements of commercial contracts.

2. WHAT IS FORCE MAJEURE?

The concept of force majeure, though alien to the common law, is an established doctrine in French law which relieves a promisor from responsibility for non-performance in certain circumstances. Although having a close affinity with the common law doctrine of frustration, it is somewhat narrower in its relieving effects.¹⁷ Many force majeure clauses in English contracts actually use the French words and, as an aid to their construction, reference is sometimes made to their meaning in French law.¹⁸ It therefore becomes necessary to examine the meaning of the term in that jurisdiction.

(a) Force majeure in French law¹⁹

The words force majeure appear in article 1148 of the Code Civil which provides: “There is no place for any damages when, as a result of force majeure or cas fortuit,²⁰ the debtor has been prevented from conveying or doing that to which he was obliged or has done what was forbidden to him.” To invoke successfully a defence of force majeure the debtor (promisor) must show that performance has been made impossible and not merely more onerous. In this respect force majeure corresponds with the English law of frustration.²¹ Where French law differs, however, is in the rule that technical performance excludes the defence. If the contract is capable of technical performance a defence of force majeure will not be available, even though the economic foundation of the contract may have disappeared. In this respect the French law of force majeure is narrower than the English law of frustration, which does relieve a promisor in such circumstances.²² French law takes into account only physical or legal impossibility.²³

To qualify as force majeure, the event preventing performance must have been both unforeseeable and irresistible. If the event was foreseeable, provision for it should have been made in the contract or the obligation ought not to have been assumed. So too with the doctrine of frustration in English law, the presumption being that where the parties have foreseen a risk but have made no provision for it in the contract then the loss is intended to lie where it falls.²⁴ The failure to perform must have been irresistible in the sense that it was both unavoidable and insurmountable; where there is an alternative method of performance or where the obstacle to performance might have been removed, the promisor will not be able to invoke the doctrine. That this is also the position in English law is illustrated first, by those cases which held that the closure of the Suez canal was not a frustrating event since the goods in question could have been shipped via the Cape of Good Hope²⁵ and secondly, by the rule that impossibility of performance in one of a number of possible ways of performing the obligation will not amount to frustration.²⁶

There are occasions, however, where the French law of force majeure can be more generous to the promisor than would the English doctrine of frustration. In one case,²⁷ a vendor had contracted to deliver wine “by the end of February” but found, on attempting to do so in the last three days of the month, that all roads were impassable owing to flooding. The court held that he was excused performance but it is doubtful whether the vendor could have successfully pleaded frustration in an English court. Unless the goods were specific goods, an English court would have taken the view that such a risk was assumed by the vendor. The vendor could be expected in such a case to provide for delivery from some other source.²⁸ As Pickford L. J. said in Blackburn Bobbin Co. Ltd. v. Allen & Son²⁹: “Why should a purchaser of goods, not specific goods, be deemed to concern himself with the way in which the seller is going to fulfil his contract by providing the goods he has agr...