Force Majeure Clauses: Their Role In Sale Contracts

There have been a number of global events in recent years that have threatened the performance of international sale contracts. Firstly, there was the 2008 financial crisis and global recession. This was followed by a number of natural disasters, including the eruption of the Icelandic volcano Eyjafjallajokull, the Japanese earthquake and tsunami, floods in Australia affecting the export of commodities such as coal and drought in Russia threatening wheat crops. There has also been civil and political unrest in the Middle East and North Africa this year, which has jeopardised the fulfilment of contracts with counterparties in the affected countries. This briefing considers the options open to traders faced with such situations and reviews how they might best protect themselves.

Frustration of contract

A party faced with an external occurrence or event that may make its performance under a contract impractical, onerous or even impossible might seek to argue that the contract has been frustrated. Under English law, frustration will result in the contract being terminated so that the parties are excused from further performance. However, in order for a contract to be frustrated, the event in question must be unforeseen, it must have occurred without the fault of either party to the contract and it must either make the contract's performance impossible or it must destroy the fundamental purpose of the contract. The contract must also not contain a provision dealing with the supervening event, otherwise there can be no frustration on the basis that the contract has already allocated risk in terms of that occurrence.

It is rare for an argument of frustration of contract to succeed before the English courts. A change in circumstances which means that one of the parties turns out to have made a bad bargain will not be sufficient. Arguments based on a sharp drop in the market, global recession and unavailability of the goods from the original source have all failed in recent years.

For example, in the case of CTI Group Inc v Transclear SA (The Mary Nour) [2008] EWCA Civ 856, the sellers of cement consignments sought to argue that the sale contracts were frustrated because their suppliers had let them down as a result of a cartel being operated in the Mexican cement market. The English Court of Appeal held that the seller had taken on the risk of its chosen supplier not making the goods available. The implication was that the seller could have sought to obtain similar goods elsewhere in order to fulfil its contractual obligations even though this might have been financially burdensome and ultimately unprofitable for them.

Frustration compared to force majeure

Given the reluctance of the English courts to find that a contract has been frustrated, many international trade contracts incorporate force majeure ("FM") clauses. Force majeure is not an English law concept but it can be applicable to contracts governed by English law where the parties have incorporated an express FM provision in their contract. An FM clause provides that one or both parties can cancel a contract or be excused from either part or complete performance of the contract on the occurrence of a certain specified event or events beyond the parties' control. Sometimes the FM clause will entitle one or both parties to suspend performance or to seek an extension of time for performance. Unlike frustration, therefore, an FM event will not always bring a contract to an end if the FM clause provides otherwise. For example, many GAFTA forms contain force majeure / strikes clauses which allow the seller to serve a notice on buyers setting out that a delay is likely to occur in delivery or shipment of the goods in question and, if necessary, seeking an extension of time. Where the delay in question extends beyond 30 consecutive days, the buyers will then have an option to cancel the delayed portion of the contract.

Another difference between frustration and force majeure is that English law does not prevent a party from relying on an FM...