Dec 15, 2020

Force Majeure vs. Frustration: The Clear Difference | Deola Osifeko

 


Usually contracts not only spell out rights and obligations of parties, it defines the scope of the legal or commercial relationship as well as anticipates unforeseen situations (like we have experienced and are still experiencing the effect of the outbreak of Covid19 which has not only altered daily living but how we discharge our duties in the workplace and other legal/commercial arrangements).

Specific contract provisions like the principle of force majeure and the doctrine of frustration may be invoked to mitigate liability arising from a breach. While the former is the creation of contract the latter is the creation of common law.

It is therefore safe to include force majeure clauses in contracts. Force majeure refers to a clause that is included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and prevent participants from fulfilling contractual obligations. The effect of such a clause is that it contemplates extraneous business risks occasioned by future events which are beyond the control of any party to the contract, affecting the parties from discharging same and providing a flexible approach on how parties manage the situation. 


Therefore, a party affected by outbreak of disease (epidemic, pandemic), war, riot or natural disaster (Act of God) can invoke the force majeure clause to avoid liability for default that will result in breach of contract i.e the failure of performing obligations of the contract arising from the unforeseen event.

A well written force majeure clause must provide for:

 

- A range of events that triggers the non performance of the contract

- The impact of the effect when the clause is invoked

- The impact of such invocation on parties contractual obligations

 

On the other hand common law envisages that a contract may be discharged or set aside on the ground of frustration i.e when an unforeseen event interferes with the capacity of the parties to fulfill contractual obligations. It therefore implies that a contract may be frustrated where due to supervening events, parties are unable to substantially perform their obligations as anticipated in the contract. (Note that the presence of a force majeure clause and frustration clause in one and the same contract renders the frustration clause ineffective i.e displaces the frustration clause).

 

A supervening event is an event that occurs:

a.     After the formation of the contract

b.     Without its inclusion in the provisions of the contract and

c.      In absence of anything either party is capable of doing by way of a fault or default or anticipatory acts

d.    When the nature of the contractual rights and obligations is substantially altered or interfered with such that:

·        Performance of the contract has become impossible

·        The contract is now totally different from what the parties intended

·        A fundamental contractual term has become incapable of being performed.

 

However, where a force majeure clause displaces the effect of the doctrine of frustration in a contract: for events within the force majeure clause, a party can argue frustration for any event beyond the scope of the force majeure clause and the court may grant an order in favour of such argument.

 

The striking difference between a force majeure clause and frustration apart from the fact that the former is a creation of contract is that parties may choose to resume or defer their rights and obligations after the supervening event is over while in the case of frustration, parties are discharged from rights and obligation arising from the contract although any partial performance must either be compensated or partial payment recovered.

 

Adeola Osifeko

Corporate Commercial and Dispute Specialist

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