Insights

Updating contracts to include force majeure/frustration clauses

What is a force majeure clause?

A force majeure clause is a clause that allows parties to be excused from their contractual obligations when an unforeseen event (beyond the control of the parties) occurs. Examples of unforeseen events include natural disasters, war, and most recently, the COVID-19 pandemic.

There should be a precise process that is stated in the contract in order to invoke a force majeure provision. If not, the party affected typically just writes to the other to let them know that a force majeure event has transpired and how that has affected their capacity to fulfil their obligations.

It is usually not sufficient to demonstrate that an occurrence has simply made it more difficult or expensive for the party to fulfil its responsibilities for it to be recognised as a force majeure event (e.g. the price of raw materials or labour has increased). It must either become impossible or extremely difficult for the party to fulfil its contractual obligations for the force majeure clause to be activated, but again, this depends on how the clause is worded.

For instance, if the clause states that a force majeure event must “prevent” the affected party from performing, then the clause may only be invoked if an incident has occurred that has made such performance impossible.

On the other hand, if the clause specifies that a force majeure event must “hinder” the affected party’s performance, then the clause will only be applied if the incident makes performance more difficult, rather than impossible.

Effects of invoking a force majeure clause

  1. Suspension of obligation

Generally, upon successfully invoking a force majeure clause, the obligation to perform the contract is suspended while the force majeure event continues. This obligation is “re-activated”, where practicable, when the force majeure event ends.

  1. Extension of time

This pertains to extending the time for the performance obligation. Unless the event can be rescheduled, this is seldom used.

  1. Termination of liability

Depending on whether the contract provides for the termination of the contract without liability upon the occurrence of a force majeure event or not, the defaulting party will be able to withdraw from their contractual obligations without having to incur any liability.

Do note these clauses seldom compensate the affected party.

What happens if there is no force majeure clause in the contract?

If there is no force majeure clause in a contract, you will have to rely on the Frustrated Contracts Act (Cap 115) to relieve yourself of the duty to discharge your contractual obligations.

How is Frustration different from a force majeure clause?

Like a force majeure clause, when a contract is frustrated – it essentially stands cancelled. Neither party needs to compensate the other, but the situation in which it can be triggered is slightly different from the force majeure clause.

The Frustrated Contracts Act allows the courts the authority to decide on the most equitable manner of terminating the agreement while, to the greatest extent feasible, preventing one party from unfairly profiting from the termination at the expense of the other.

  1. Scope difference

Firstly, the Frustrated Contracts Act does not define the scope of the triggering event that enables a contract to be frustrated. This means that whether the event qualifies as a “triggering event” may be subject to dispute. This is in contrast to a force majeure clause that spells out the triggering events and where there is little room for dispute on the scope of the terms.

  1. Manner of cancelling the contract

Typically, a force majeure clause would provide for the manner in which the contract can be terminated or suspended upon the occurrence of a force majeure event. Unlike the force majeure clause, invoking the Frustrated Contracts Act gives discretion to the court to determine the most suitable manner in cancelling the contract and requires this to be done in a fair and just manner.

Should you have a force majeure clause?

A force majeure clause provides more certainty as the contracting parties have the autonomy to define the consequences available. Further, a well-drafted force majeure clause helps avoid litigation completely. If one relies on the Frustrated Contracts Act, then at every level one has to depend on the court’s decision which leaves a lot to chance and increases costs  incurred in litigation.

Please note that this article does not constitute express or implied legal advice, whether in whole or in part. If you require legal advice, please contact us at:  info@silvesterlegal.com.

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