The terms frustration and force majeure tend to be used interchangeably in relation to the inability of a party to perform his or her contractual obligations. Parties may wrongly use the terms as a reason to avoid being held liable for failure to perform a valid contractual obligation. While it may generally be said that the two terms are related, there are significant legal distinctions which determine liabilities a party who fails to perform may assume and the extent of such liabilities.
This short write-up explains what is meant when a contract is frustrated as against when a contract is affected by a force majeure event. Distinctions are drawn in terms of the consequences for the occurrence of a frustration event as against a force majeure event.
Contract and contractual obligations
A contract is generally defined as a binding agreement. That means some agreements are not binding, and therefore not contracts. For an agreement to mature into a contract, it must satisfy a number of legal requirements. These are: the parties must have the capacity to contract, have the intention to have a binding contract, and have an exchange of consideration. A number of common law and statutory provisions set the principles relating to what amounts to an agreement, the capacity of the parties, provision of consideration, and intention to create legal relations. Once all these requirements are satisfied, one has a valid contract. That contract should not be affected by what is generally termed vitiating factors for it to be enforceable.
While the above elements are required by law, let us for instance take them for granted. In more practical terms, the parties entering into a contract are doing so for specific gains. These may be everyday activities – buying food, taking a taxi or uber to work, ordering items online, asking a mechanic to fix one’s car, engaging the services of a cleaner etc., to more complex projects and financial transactions. Some of the preceding examples indicate some instances when a person may enter into contract without even recognising it. The more recognisable situations are when one is signing a document referred to as a contract. A contract can be in writing, verbal, through conduct or a mixture of all three.
When entering into a contract, there is an expectation that something will be given in return for something, or someone foregoing some benefit. In other words, the contract involves a series of activities to be taken by the parties to the contract. The drafting of a contract is required to reflect the series of activities the parties expect each other to undertake. The activities to be engaged in by each party to the contract becomes the contractual obligation that each party must perform. The performance of such obligation will be of benefit to the other party. Whether verbal or in writing, the contract entered into must precisely indicate the activities that each party is to perform.
Frustration vs Force Majeure
In setting out such activities when entering into the contract, the parties may do one of two things: First, the parties may envisage occurrences which can prevent one or both parties from performing the activities agreed to under the contract. Secondly, the parties may fail to engage in such a prophesying journey; hence, when there is an occurrence that prevents a party from carrying out activities agreed to under the contract, they are faced with a new situation they are not prepared for.
If the parties had adopted the first option, they would list possible occurrences which might prevent the performance of each parties’ obligations and agree on how they will proceed should any of such events occur. In the second instance, the parties would not have agreed on what to do. The first situation is a force majeure situation, while the second situation is a frustration event.
Thus, a contract is frustrated when an event occurs that renders the performance of the contract impossible or impracticable, or the obligations under the contract are fundamentally different from what was agreed. The occurrence of the event is not the fault of either party, and the parties failed to factor that event into their initial discussion in concluding a contract.
For a contract to be frustrated therefore:
- an event must occur after the parties have concluded a contract – written or verbal
- the event must not be the fault of either party
- the parties have not planned for the event
- the event has rendered performance of the contract impossible or impracticable, or the obligations are fundamentally different from what was agreed.
For example, if party A enters into a contract to cook for party B on a specific date personally and party A tests positive for COVID-19, resulting in party A being in isolation and unable to cook for party B, that will be a frustration event once the agreed date is within the period of mandatory isolation. Falling sick therefore becomes a frustrating event.
Using the same event, falling sick becomes a force majeure event if the parties at the time of entering into the contract envisage the possibility of one or both parties falling sick, provide for it in the contract and indicate how it should be treated. For example, by postponing the date for cooking to a later date after recovery.
Therefore, a force majeure event is an event whose occurrence renders the performance of the contract impossible or impracticable but which the parties have made provision for in their contract. That is, agreeing on what to do should the event occur. Once the parties provide for what to do should the event occur, the event ceases to be a frustration event and becomes a force majeure event.
The best scenario in drafting a contract or in entering into a contract is to avoid having such a contract discharged through frustration by envisaging events which could render it impossible to perform the contract and agreeing on what to do should that event occur. Parties entering into a contract or lawyers drafting a contract must therefore play the role of a prophet by looking into the future to determine events which can occur to prevent performance of the contract and provide for them. These events generally include acts of God (flood, earthquake, fires etc.), riot, civil unrest, war, strikes, pandemics, explosions, radioactive contamination etc. Once that is done, a possible frustration event is converted to a force majeure event.
Why is that conversion necessary? The importance lies in the consequences of frustration of contract as against occurrence of force majeure. It is more prudent for parties to have control over their affairs than leaving such determination to the law. The parties are free to determine their next course of action should an event occur that renders it impossible for them to perform obligations assumed toward each other. The law supports that position.
However, if the parties fail to do so, the law dictates the consequences should the event render performance of the contract impossible. First, the law provides that the contract is discharged once the event occurs. That is, the parties are under no obligation to continue performance of the contract. Put more bluntly, there is no obligation on the parties to do any of the activities under the contract.
Secondly, the law apportions liabilities. Any amount that is to be paid under the contract will no longer be payable. Any money paid under the contract is to be recovered. Any expense incurred toward or in preparation for performance of the contract will be recoverable. This position is automatically applicable once an event is determined to have frustrated a contract. It does not matter whether there is a better solution.
So, in the contract to cook situation described above, it does not matter if the date for cooking could have been postponed to a future date based on the same terms. A simple agreement on the possibility of the event occurring and providing a possible solution could have avoided the effect of the law mainly treating the contract as discharged with its apportionment of liabilities.
Another advantage of converting such a frustration event into a force majeure event is to avoid or minimise disputes over what constitutes frustration. The event must satisfy three main conditions: First, the event must render performance impossible or impracticable, or fundamentally change the obligations under the contract.
Secondly, the party relying on the event must not be responsible for the event; and thirdly, the parties must not have control over the event or contribute to occurrence of the event. The parties may disagree on whether the event satisfies these three conditions. However, parties are free to precisely define what constitutes a force majeure event to avoid a dispute over which event satisfies these conditions to trigger frustration. This reduces potential future disputes, which can themselves be more expensive and time-consuming.
COVID-19 has been with us for over a year and a half. Effects on supply chains and workforces are generally known. Similarly, the applicable possible frustration events within specific sectors are well known. There is no reason for a COVID-19 outbreak at the workplace or events well known within industries to lead to frustration of contracts. Whether verbal or in writing, the parties should provide for how to deal with these events to transform the frustration events into force majeure events in their contract. In this way, the parties to the contract take control of their destinies and avoid possible future disputes.