COVID-19: Force Majeure And Frustration Of Contracts – Coronavirus (COVID-19) – Bahamas – Mondaq News Alerts

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The COVID-19 pandemic has disrupted commercial activity on aglobal scale, challenging contracting parties' ability tofulfil their legal obligations. Force majeure clauses andfrustration principles may provide some relief to those which mayotherwise incur liability because of non-performance.

A force majeure clause enables the parties to acontract to suspend or terminate their obligations where theoccurrence of exceptional events or circumstances make theperformance of the contract impossible or radically different fromthat which was undertaken by the contract.

There is no presumption of a force majeure event andparties that wish to include a force majeure clause in acontract should specifically define the kinds of superveningoccurrences that would constitute a 'forcemajeure' or 'superior force'. Parties could tailorthe clause to include events that may be unique to theircircumstances. Occurrences generally accepted as a forcemajeure include: riot, war, rebellion, governmentrestrictions, earthquakes, floods, fires, strikes and civilunrest.

Unforeseen events that could disrupt a contract are myriad sothe courts may have to interpret a force majeure clause todetermine whether the particular occurrence is covered.Judges will construe a force majeure clause with closeattention to the words in the clause and with regard to the generalterms of the contract. The effect of the clause may vary with eachinstrument as certain events in a force majeure clause maynot always be beyond a party's sphere of control.

Force majeure clauses sometimes include a catch allphrase such as "... or any other cause beyond theparties' control". While in some cases the courtshave allowed parties to use this phrase for events not stated orunrelated to those in the force majeure clause1, inother cases they have rejected certain occurrences even where therewas a catch all phrase2.

Where a force majeure clause covers a particular event,a party relying upon the clause may not be excused from the contactmerely because the performance of the contractual obligation ismore difficult or less profitable3. A defaulting party who wishes torely upon a force majeure clause will have the burden ofproving that the serious event has made it impossible to perform orradically changed his ability to meet his contractualobligation.

Whether the COVID-19 pandemic constitutes a forcemajeure will depend on a contract's wording. It may becovered under a force majeure clause if words such as'pandemic', 'epidemic' or 'disease' areused.

'Act of God' is often used in force majeureclauses, and it is widely felt that the COVID-19 pandemic fallswithin the ambit of this term. 'Act of God' has beenlegally defined as: "such a direct and violent and suddenand irresistible act of nature as the defendant could not, by anyamount of ability, foresee would happen, or, if he could foreseethat it would happen, he could not by any amount of care and skillresist, so as to prevent its effect"4. It has also beenheld to cover one-off events which "involved no humanagency"5. Acts of God have generally beenconfined to natural disasters such as floods and earthquakes.

While it could be argued that COVID-19 is a factor of nature, itseems unlikely that the courts would affirm that it is an act ofGod because it has historically been applied to geographicphenomena. Also, the nature of the pandemic may not be seen assufficiently direct or violent so as to make persons unable toavoid its effects.

Frustration is a common law doctrine that is similar in natureto force majeure, but somewhat narrower in scope. Itrecognises that an event may occur through no fault of the parties,which may make a party unable to carry out its obligations under acontract.

Even if there is no force majeure clause in a contract,a party may be relieved from its obligations if it can establishthat a frustrating event has occurred. Whether a particular radicaldevelopment is deemed sufficient to frustrate a contract willgenerally depend on past decisions of the courts. While there is nospecific test to establish frustration, it may generally arisewhere:

Hurricanes, earthquakes, strikes and civil unrest have beenfound to be sufficient to frustrate the performance of acontract.

In Hepburn v. Taylor6,where a defendant sought to rely onthe doctrine of frustration in his defence, the court stated thatthe circumstance rendering it impossible for a party to fulfil itscontractual obligations must not be due to that party's fault,and that frustration must not be self-induced.

In Millennium Telecommunications Limited v. BahamasTelecommunications Company Ltd.7, the court affirmed the principlesthat a frustrating event must be beyond the parties'contemplation when the contract is agreed. The court also statedthat the impediment should not be the fault of either party, socircumstances caused by negligence or oversight will not constitutefrustration.

There does not appear to be any clear case law precedent forCOVID-19, so it is uncertain whether the pandemic will be deemed afrustrating event by the courts.

It may be found that the pandemic is a frustrating event becauseof the level of disruption that it has caused to the world'seconomy. It should be noted that parties which have entered intocontracts since the spread of COVID-19 began may be unable toassert frustration because of foreseeability.

Even if the disease itself is not deemed to be enough tofrustrate a contract, the consequences flowing from it suchas government curfews and shutdowns will likely be seen asenough to render carrying out a contract impossible. Manycommercial entities were forced to close pursuant to emergencypower orders and so performance of commercial activity becameimpossible through no fault of their own.

The COVID-19 pandemic is expected to lead to a wave of legaldisputes as to which party bears the risks of non-performance. Theapplication of force majeure and frustration legalprinciples in court decisions in the near future will likely betterdefine the rights of contracting parties affected by thepandemic.

In the wake of the pandemic, many companies and individuals havesought to place force majeure clauses in commercialcontracts and have included the abovementioned words as protectionin case they cannot perform their contractual obligations due toCOVID-19 or other similar challenges.

Contractual terms, particularly those of great importance to acontracting party's business, should be checked to ensure thata force majeure clause is included. In order to protectthe parties from difficulties that may arise from a pandemic, theforce majeure clause should include such key words as'pandemic', 'epidemic', 'disease','government restrictions' and 'state ofemergency'.

Footnotes

1 Chadrisv Isbrandtsen-Moller Co. Inc. [1951] 1 KB 240.

2Tandarin Aviation Holdings Ltd. v Aero Toy Sore LLC [2010] 2Lloyd's Rep 668.

3Tennants (Lancashire) Ltd v G S Wilson & Co Ltd [1917] AC485.

4 Nugentv Smith (1876) 1 CPD 423 at 426.

5 Transcoplc v Stockport Metropolitan Borough Council [2003] UKHL61.

6 [1997]BHS J. No. 90.

7 [2017]1 BHS J. No. 88.

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COVID-19: Force Majeure And Frustration Of Contracts - Coronavirus (COVID-19) - Bahamas - Mondaq News Alerts