Is there a difference between force majeure and frustration – a common law perspective

Introduction 

A question that is being repeatedly asked, especially in the current geopolitical climate, is whether force majeure applies to every contract upon the outbreak of war or hostilities. The UAE civil code does provide for specific force majeure events¹, which have been discussed at great length over the recent weeks, and which is not the subject matter of this article. However, the UAE is unique in numerous ways, one of which is that it is a country with three differing legal systems; the civil system that applies to the mainland, the quasi-common law system found in DIFC, and the common law system found in ADGM. Accordingly, what amounts to legal force majeure under the UAE civil code is not necessarily the same in the DIFC/ADGM jurisdictions. 

What is force majeure? 

Force majeure, in the common law system, is a creature of contract not a legal principle. The legal principle is actually the common law doctrine known as frustration², which differs to that of force majeure in common law. 

Force majeure clauses, also known as ‘acts of God’ clauses are those found within contracts that allow for temporary suspension of obligations in the event of specific events, and if the event continues over a specified period of time the contract could be mutually terminated³. What is important to note is that, because force majeure is generally expressed within the contract itself, only those events expressly stated as amounting to a force majeure event will be considered applicable, contractually. Put another way, if a contract does not explicitly state that a certain event or circumstance constitutes force majeure, a party cannot rely upon it to claim that performance of a contract should be suspended. Interestingly, because the events are mutually agreed, it is possible for many types of events to be missed out completely. Some contracts do not state that acts of war are force majeure, labour strikes could be excluded and in many instances acts implemented by governments are also excluded. Famously, the extent to which the COVID-19 pandemic could be treated as a force majeure event differed significantly between different contracts. In addition, calling force majeure is unlikely to excuse performance entirely - it is common to find obligations to mitigate against the force majeure event, whereby the party claiming force majeure is obliged to use its reasonable measures to remove the force majeure event and its impact. 

In general terms force majeure relates to events that are totally outside the control of either party, not reasonably contemplated by either party, and serious enough to prevent performance of an obligation. The reason why these clauses are generally referred to as ‘acts of God’ clauses is because, in an extreme weather event or geological event (think earthquake or volcano), the event is clearly not something which either party influenced, caused or could possibly predict; although if a contract to build something at the base of a volcano is the subject matter, then it is reasonable to assume that a risk of eruption exists and the parties took that risk in any event, thus defeating force majeure.  

Another important aspect to force majeure is that it initially offers relief from obligations on a temporary basis, normally until the event passes, thus allowing the parties to resume. An example would be where an area not expected to flood was suddenly overwhelmed by a freak weather event, which prevents the construction of a building. This could amount to a force majeure event. Such floods, whilst devastating, do not generally last for a lengthy period of time and it could be possible to recommence construction activities within a period of 30 days. Assuming there was a time period to complete, the effect of the force majeure clause would be akin to deleting the 30 days of the force majeure event, as if it never existed. The time the force majeure event lasted is then added onto the time line once the event ceased, thereby offsetting the event so that the contractor still has same time period to complete. 

All seems pretty straight forward so far, but where does frustration come into play? 

Frustration 

Unlike force majeure, frustration is a common law doctrine⁴ that has been developed to add some degree of movement to the harshness of the common law contractual approach. This approach, historically, only considered, literally, total performance as absolute and once a promise was made it had to be made good. Excuses for non-performance would not suffice. Whilst lawyers did all that they could to find wriggle room and sow the seeds for frustration, it wasn’t until 1863 that those seeds bore fruit. 

In Taylor v Caldwell⁵ the defendant had entered into a contract to hire out Surrey Gardens and a Music Hall within Surrey Gardens for the purpose of 4 grand concerts. Before the concerts could get underway, the music hall was consumed by fire due to no fault of any of the parties. The concerts were cancelled and the claimant sought to recover their wasted expenses on advertising costs. The court held that the defendant was not liable because the contract had been discharged: 

“…the parties must from the beginning have known that it [the contract] could not be  fulfilled unless…some particular specified thing continued to exist”.⁶

In reaching its decision, the court had considered that the main or fundamental purpose of the contract related to the Music Hall itself and, once it had been destroyed, the very essence of the contract lacked purpose, despite the fact that the contract also referred to ‘Surrey Gardens’ which had not been destroyed. 

Whilst some are of the opinion that nothing short of destruction of a specified thing, expressed within the contract, is required this is not the case. In Krell v Henry⁷ the specified thing within the contract was that of an apartment, which was not destroyed. In this case, the defendant entered into a contract to rent the apartment for a particular set of days. The purpose being to watch the coronation parade of King Eduard VII. The claimant had indicated that the apartment offered ‘excellent views’ of Pall Mall, where the parade was to take place. However, the King fell ill and the parade was postponed. The contract itself did not expressly state that the apartment was being hired in order to watch the parade, and the apartment was not destroyed or even damaged. Nevertheless, the court held: 

“…the event which renders the contract incapable of performance is the cessation or non-existence of an express condition or state of things, going to the route of the contract, and essential to its performance”.⁸

In Krell it was still possible to occupy the apartment and view Pall Mall, but the main purpose of renting the apartment in the first place had ceased to exist. The question being that would the defendant had entered into the contract but for the parade, for which the question was no. Accordingly, the very purpose of the contract had been removed, through no fault of either party, rendering the contract meaningless. Krell however is distinguished on its merits⁹, as the claimant was fully aware that the sole purpose behind the contract was to view the parade, but it did clarify that the only matters that go to the root of the contract, its very purpose, are sufficient to discharge the contract by frustration, in the event the thing is removed or changed totally. 

In British Movietonews Ltd v London & District Cinemas¹⁰ the House of Lords rejected the notion that ‘an uncontemplated turn of events’¹¹, which was the cessation of war time conditions, did not render the contract frustrated. The House of Lords considered this to fall under the category of a ‘bad bargain’, with Simon LJ stating: 

“The parties… are often faced…with a turn of events which they did not anticipate; a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to the execution…yet this does not, in itself, affect the bargain which they have made”.¹²

This can be further considered in what is known as the Suez Canal cases, in particular Tsakirolglou & Co v Noble Thorl GmbH¹³. In this case, the parties entered into a contract where both parties expected the goods to be transported via the Suez Canal, which was included within the price despite the contract not expressly stating that the route must be via Suez. The canal itself was then closed preventing transit and frustration was claimed. The Court held that the contract had not been frustrated because the contract did not expressly provide that transit must be via the Suez and alternative routes, albeit longer and more expensive, were available. Accordingly, the purpose behind the contract and the performance of that purpose still existed and more importantly existed at the time the contract was entered into, although had the Suez route been the sole route and expressed as such the outcome would have been different.¹⁴

Bad bargains can even extend to instances whereby it seems, on the face of it, that frustration should apply, as in the case of Super Servant Two¹⁵. This case involved a contract to transport a drilling rig and the contract expressly stated that Super Servant One or Super Servant Two should be used to carry the drilling rig. Super Servant Two sank shortly after the contract was executed, and the defendant claimed frustration on the grounds that Super Servant One was engaged on other contracts. The Court rejected the frustration argument on the grounds that the situation was ‘self-inflicted’ as it was the defendant’s decision to use Super Servant One for other contracts and it was the defendant’s actions that rendered performance impossible. 

However, not all ‘bad bargains’ are incapable of being rendered discharged by frustration. In Metropolitan Water Board v Dick, Kerr & Co¹⁶ the court held that the contract was frustrated. In this case, the defendants had entered into a contract to build a reservoir but war time restrictions¹⁷ imposed an indefinite delay on performance and once those restrictions had been lifted the court held that the contract had ‘radically changed’ to the extent that it was no longer the same contract the parties had initially entered into, despite the fact that the obligation to build the reservoir still existed without change; the price itself had materially changed. 

That does not mean that all delay situations are capable of rendering a contract discharged by frustration, as seen in the Suez Canal cases, and the approach taken by the courts is to finely balance bad bargains and frustration. Case law suggests that where the very purpose behind the contract is no longer existing or has changed so much that it is no longer the deal the parties wanted then the courts are likely to find that frustration exists, but only if it renders the discharge of the performance impossible. 

In Taylor, Krell and Metropolitan the very purpose for the contract had materially changed; no music hall, no parade to view, and war time restrictions that delayed the contract so as to totally change the conditions. In these cases, performance, whilst not strictly impossible, was no longer what the contract was actually entered into for; concerts could still be held in Surrey Gardens, Pall Mall could still be viewed and the reservoir could still be built, but these were all secondary reasons for the contract not the material purpose. 

Contrast this with Super Servant Two and Tsakirolglou. The purpose behind the contracts still existed and had not materially or radically changed from what the parties expressed in the contract. In those cases, the purpose of the contract still existed, as expressed within the contract itself. Super Servant One was unavailable due to the acts of the defendant and the Suez Canal was not the sole or even the route expressed within the contract. As such the bargains were bad but performance not impossible, just less attractive. 

Effect of Frustration 

Unlike force majeure, if a contract is held to have been frustrated, it is void and the parties are excused from all obligations. Force majeure does not void or rescind a contract, unless the contract expressly provides for such measures. Most force majeure clauses generally allow for termination if the force majeure event continues for a significant length of time, but even with such terms the parties are still held to certain obligations up to the force majeure event, such as payment for services or materials provided prior to the event. This makes a contractual force majeure ‘voidable’ as opposed to void. 

Frustration, under common law, and to an extent under Law Reform (Frustrated Contracts) Act 1943, automatically terminates the contract: it releases both parties from all obligations and if payments have been paid these can be recovered, subject to offsetting expenses incurred¹⁸. 

Current Situation 

In the current geopolitical situation, many are of the view that contracts, of varying types, can be considered subject to force majeure or potentially frustration. In a vast majority of cases neither position will be applicable, except in a few limited situations; such as ships that were chartered prior to the recent hostilities and potentially stuck in the Gulf unable to transit through the Straits of Hormuz. If those charters are subject to English law, then it could be possible to raise frustration as the Straits of Hormuz is the only passage available and the present situation potentially renders performance impossible.  

Contrast this with an individual who entered into a contract to purchase a house prior to the hostilities. Unless the house has been destroyed, the purpose of the contract has not changed and performance is still perfectly feasible. Yes, the surrounding situation may have altered and the buyer no longer eager to purchase a house in such circumstances, but this is more of a bad bargain, not frustration and not force majeure, although that depends on the contractual terms. 

The question that needs to be considered is whether the purpose of the contract has materially changed, either by the thing no longer existing or changing so much that it is no longer the contract the parties intended. If the answer to that question is no, then neither force majeure nor frustration will discharge the obligations.