A contract will remain enforceable, unless it is brought to an end by the application of relevant contractual terms (force majeure) or common law principles (frustration).
What is Force Majeure? Force Majeure only arises when parties incorporate into their contracts terms which stipulate that a contract comes to an end or is temporarily suspended where either party is unable to fulfill his/her/its contractual obligations due to unforeseen and unpreventable circumstances commonly referred to as ‘Force Majeure events’. Most commercial contracts contain Force Majeure clauses. Whether circumstances have arisen which may bring a Force Majeure clause into effect will depend on the express wording of the contract. It is therefore important to interpret the contract to find the true intention of the parties. The fact that a contract becomes more difficult or costly is not usually sufficient to constitute a force majeure event; a party should be truly incapable of performing their contractual obligations, having taken all reasonable steps to mitigate adverse consequences. Careful consideration should also be given to whether a Force Majeure clause has the effect of terminating the contract or merely suspending its operation for a period of time. Where contracts do not provide for Force Majeure, contractual obligations may be terminated by frustration. Save and except certain circumstances, Frustration may only be relied on where parties have not incorporated Force Majeure clauses into their contracts. Where a Force Majeure clause is incorporated, parties can usually only rely on the terms of that clause.
What is Frustration? Frustration occurs when through no fault of either party, it becomes impossible or illegal to perform one’s contractual obligations, or where compliance with outstanding obligations would be unreasonable because the circumstances in which performance would have to take place would be radically different from what was envisioned by the contracting parties. Once frustration occurs, the contract is immediately terminated. Frustration, like Force Majeure, will depend on the terms of the contract and whether in fact performance, even at a later or delayed date, would be unreasonable or impossible in the circumstances. To determine whether a contract is frustrated, one must thus look to the terms of the contract, the context of the contract, the parties’ prior knowledge of the potentially frustrating event, the nature of the potentially frustrating event and the parties’ reasonable expectations in respect of future performance of the contract. As noted above in relation to force majeure clauses, the fact that a contract becomes more difficult or costly is not usually sufficient; a party should be truly incapable of performing his/her/its contractual obligations as a direct result of the frustrating event.
Are costs incurred or payments made before Force Majeure or Frustration recoverable? Force Majeure clauses usually provide for the recovery of costs and payments made prior to Force Majeure events. However, if the clause is silent as to the recovery of expenditure, the usual position is that “costs lie where they fall”, meaning that they are unrecoverable. Under the Civil Code of Saint Lucia, costs incurred in partial fulfilment of contractual obligations are generally recoverable. The usual position is that a party who has performed their obligation in part must be compensated for the benefit gained by the receiving party for that part fulfilment. Monies paid where no benefit has been received by the paying party must also usually be returned. As in all cases, this may vary depending on the terms of the contract and the nature of obligations contained therein.
What should I do if I believe that a contract has been terminated due to Force Majeure or Frustration? If you neglect to fulfil contractual obligations without the other party’s written agreement that Force Majeure or Frustration apply, you may be liable for breach of contract if your non-performance/termination is found to be unlawful. In the absence of such agreement, legal advice should be sought.
FLOISSAC, DUBOULAY & THOMAS provides this information for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. This guidance note is not intended to be, and should not be construed as, legal advice for any particular situation and you should not act upon this information without seeking advice from a lawyer. If you have any questions, please feel free to contact us at info@fdt.law.