The world has over the years witnessed a wide range of examples of powerful forces, natural and man-made, which often have an unavoidable long-lasting and dramatic effect on the commercial landscape. We have seen tsunamis, earthquakes, revolutions and civil wars make headlines, which are often followed by economic crises.
Today, let's consider some of the legal implications on commercial contracts such as force majeure and frustration arising from negative world crises. Force Majeure has its origins in Roman law under the name “vis major” or “vis divina” where unforeseeable and irresistible events relieved a party from responsibility for non-performance of contractual obligations. The doctrine was then adopted by civil law countries.
The Black’s Law Dictionary defines “force majeure” as “An event or effect that can be neither anticipated nor controlled. The term includes both acts of nature (e.g. floods and hurricanes)”.
A further definition is given of an “Act of God” as being “ An overwhelming, unpreventable event caused by forces of nature such as an earthquake, flood or tornado… the effect of which could not be prevented or avoided by the exercise of due care of foresight.”
Events that result from natural phenomena (for example, flooding, strong winds or ice storms) as well as acts due to human intervention such as third-party actions (for example, strikes, wars, acts of terrorism, embargoes or rebellions) are some of the occurrences that would qualify as force majeure. The list of these events is inexhaustible, so let us look at the characteristics of a force majeure event.
According to case law, to constitute force majeure, an event must be both unforeseeable and irresistible. Unforeseeability means that the party claiming “force majeure” did not foresee it neither could he/she be reasonably expected to foresee the same. It is also expected that such a party's efforts to tackle the event must be useless or futile.
Further, the impossibility of a reasonable party to have taken reasonable measures to avoid the occurrence of the event is an additional requirement. Irresistibility means that the harm-causing event must render absolutely impossible the performance of the debtor's obligations.
If performance becomes more onerous, perilous or difficult, the irresistibility element of the force majeure concept is not met.
The doctrine of frustration is said to be the common law equivalent of the civil law force majeure doctrine in the area of contracts.
Following leading English cases, common law courts have concluded that frustration takes place when a supervening event, which occurs without the fault of either contracting party, so significantly changes the nature of the parties' rights or obligations that it would be unjust to hold them to the contract's literal stipulations in the new circumstances.
The criteria used to satisfy the test of the doctrine of frustration include that: (i) the event in question must have occurred after the formation of the contract and cannot be self-induced; (ii) the contract must, as a result, be totally different from what the parties had intended.
This difference must take into account the distinction between complete fruitlessness and mere inconvenience; (iii) the disruption must be permanent, not temporary or transient. The change must totally affect the nature, meaning, purpose, effect and consequences of the contract so far as concerns either or both parties; and (iv) the act or event that brought about such significant change must not have been foreseeable.
Impossibility of performance is a key factor in determining whether a contract has been frustrated. Impossibility has been linked to cases of physical impossibility (for example, where the subject matter of the contract has been lost or destroyed), supervening illegality, death or sickness of a contracting party in a personal services contract, land transactions (for example, sales or leases of property) and even delays in contractual performance due to natural phenomena or acts of third parties for example, wars, government regulations, strikes.
There is a striking resemblance between the civil law doctrine of force majeure and the common law doctrine of frustration as has been covered above. A typical force majeure clause in a contract should spell out specific events that would meet the ‘force majeure’ characteristics discussed earlier.
Mueni Kalola, Commercial Law Advocate.