Crazy days! Force majeure & frustration!

Photo by Adam Azim on Unsplash

I never thought that the subject of impossibility and frustration in relation to contract would become such a popular topic of everyday conversation; but it has.

The phrase “force majeure” has also been making more of an appearance than is commonly the case.

Why?

The continuing fallout from Coronavirus or COVID-19 has led to all sorts of sporting and cultural events being cancelled or postponed. We are also about to enter the holiday season with the Spring Break and Easter Weekend just over the horizon. Many people will have booked getaways to foreign climes and events have now completely overtaken such plans.

Critically, thousands of people will have paid something up front for football season tickets and holidays and they will be anxious to know where they stand legally.

Hearts owner Ann Budge says she would consider legal action should her club be relegated from the Scottish Premiership with eight games left:

Coronavirus: Hearts would seek legal advice if relegated

So where do they stand legally?

There are two ways of dealing with an unexpected situation which affects contractual performance: being reactive or being farsighted.

At the moment, the scale of COVID-19 has completely taken Governments, societies, business, cultural, sporting organisations and individuals completely by surprise. So, in a sense, we are being forced to react to changing circumstances and rely upon established legal contractual principles which govern the termination of agreements i.e. frustration, impossibility and illegality. More about these matters shortly.

As lawyers, could we have pre-empted or foreseen that events (I’m speaking in the general sense here) might render contractual performance highly unlikely or well nigh impossible? Well, yes the concept of Force Majeure clauses is recognised in contract law – although the linguists amongst us may recognise that it’s not a native species of English or Scots law.

words ‘force majeure’ are not words which we generally find in an English contract. They are taken from the Code Napoleon and they were inserted by this Romanian gentleman or by his advisers, who were no doubt familiar with their use on the Continent.”

In the English case of Matsoukis v Priestman [1915] 1 KB 681 Bailhace J in English High Court noted that the:

Bailhace J was of the view that force majeure clauses could cover events such as industrial action, but certainly not bad weather or football or funerals.

Yet in the later English High Court decision Lebeaupin v Richard Crispin [1920] 2 KB 714, force majeure was given a much broader meaning to include events such as war, bad weather, industrial action and, interestingly, epidemics. That said McCardie J was at pains to point out:

A force majeure clause should be construed in each case with a close attention to the words which precede or follow it, and with a due regard to the nature and general terms of the contract. The eect of the clause may vary with each instrument.

Essentially, such clauses are inserted into contracts to deal with the consequences of events outwith the control of the parties which may render performance of the contract impossible.

Ross Campbell of Brodies Solicitors who has pointed out that the rules of last year’s Rugby World Cup tournament in Japan contained a force majeure clause addressing the cancellation of matches due to extreme weather. The clause was not utilised and, therefore, not challenged, but it’s an interesting example of how parties to an agreement might attempt to address situations which can have serious consequences for contractual performance.

A link to Ross Campbell’s article can be found below:

https://brodies.com/blog/dispute-resolution/the-power-of-force-majeure-clauses/

The very phrase force majeure conjures up images of an unstoppable force that sweeps away the accepted rules or conventions – almost akin to the idea of damnum fatale or an act of God.

So whether, will the courts permit the application of a force majeure clause will turn on the wording of the clause.

Could anyone have predicted the situation that we are now in with COVID-19 and drafted an appropriate clause to address these unprecedented times? It’s extremely doubtful. I’m not pretending to be Nostradamus (or for our Scottish readers, the Brahan Seer or Thomas the Rhymer) when I predict that many lawyers and their clients will actively be looking at the usefulness of force majeure clauses.

Triggering a force majeure clause

For those parties wishing to rely upon force majeure clauses, drafting the term may be crucially important. It might be highly advisable to have a list of events or circumstances which trigger operation of the clause; and then have a catch-all provision or belt and braces term to cover things you might not have explicitly specified (as per McCardie J’s remarks in Lebeaupin v Richard Crispin [1920]. Be aware, however, that extremely wide catch-all provisions may be disallowed because they are not within the normal meaning of the term (see Tandrin Aviation Holdings Ltd v Aero Toy Store LLC [2010] EWHC 40 (Comm)).

Frustration, impossibility and illegality

Let’s now turn to situations where individuals have to react to unexpected events without having the benefit of a force majeure clause in the agreement.

Since the formation of a contract, circumstances affecting the agreement may have changed dramatically (i.e. the pandemic). The contract may now be impossible to perform or the contract may have been rendered illegal by changes in the law.

Physical destruction of the subject-matter of the contract can also frustrate contracts.

Perhaps one of the best known examples of frustration can be seen in the case below:

Taylor v Caldwell (1863) the Surrey Gardens and Music Hall was hired by the pursuers from the defenders for the purpose of holding four grand concerts and fêtes. Before the first concert on 17 June 1862 could took place, the hall was completely destroyed by fire. Neither party was responsible for this incident. The pursuers, however, brought an action for damages against the defenders for wasted advertising costs.

Held: By the English High Court that it was clearly impossible for the contract to be performed because it relied on the continuing existence of the venue. The pursuers claim for damages was dismissed on the grounds that the purpose of the contract had been frustrated.

In another case, Vitol SA v Esso Australia 1988 The Times 1 February 1988, a contract for the sale of petroleum was discharged on the grounds of frustration when both the ship and its cargo of petroleum were completely destroyed in a missile attack in the Persian Gulf during the Iran-Iraq War (1980-1988). The sellers had attempted to sue the buyers for the price of the goods, but this claim was dismissed.

The ‘coronationcases

Two famous cases which are particularly instructive are the ‘Coronation Cases’ because they concern the consequences of changing circumstances. Both cases arose due to the illness of King Edward VII. The new King was unable to participate or attend a variety of events to celebrate his accession to the British throne following the death of his mother, Queen Victoria.

The English Court of Appeal took different approaches in each of the cases:

Krell v Henry [1903] 2 KB 740 the pursuer was the owner of a flat in the central London district of Pall Mall. The pursuer’s flat was on the route of the proposed coronation procession of the new King, Edward VII, which was scheduled to take place on 26 and 27 June 1902. The pursuer had advertised his flat for rent during the daytime on 26 and 27 June for the purpose of viewing the procession. The defender, who was anxious to view the procession, responded to the advertisement and entered into an agreement to hire the flat on the days specified. An announcement was made on 24 June stating that the procession was to be cancelled owing to the King’s illness. The defender refused to pay the balance of the rent for the flat by reason that events had frustrated performance of the contract. The pursuer brought an action against the defender for payment of the balance of the rent.

Held: by the English Court of Appeal that the cancellation of the event frustrated the contract and discharged the parties from their obligations under it. The clinching argument in the defender’s favour was that both parties clearly entered into the contract with the same intention.

The reason behind the hire of the flat was, therefore, a material term of the contract. Had the defender failed to communicate his motivation for hiring the flat, then the contract would have remained capable of enforcement by the pursuer.

Lord Justice Vaughn-Williams was of the opinion that frustration of contract was not limited to either the destruction or non-existence of the subject matter of the contract. It was also important to identify the substance or the purpose of the agreement. In other words, did the parties share the same intentions?

The illness of King Edward resulted in a second legal action. This time, however, the English Court of Appeal took a completely different approach to the issue of frustration of contract.

Herne Bay Steamboat Co v Hutton [1903] 2 KB 683 the pursuers had entered into a contract to hire a steamship to the defender for two days. The Royal Navy was assembling at Spithead to take part in a naval review to celebrate King Edward’s coronation.

The King was to review the fleet personally. The defender wished to transport paying guests from Herne Bay to Spithead to see the naval review. Due to the King’s illness, an official announcement was made cancelling the review. It would still have been perfectly possible for the defender to take his passengers on a cruise to see the assembled fleet. The defender, however, refused to use the vessel claiming that the contract had been frustrated. The pursuers brought an action against the defender for the balance of the fee of £250 (a considerable sum in those times) owed by the defender who was refusing to pay for the hire of the boat.

Held: the contract was not discharged by reason of frustration. The main purpose of the contract could still be achieved i.e. to take paying guests for a cruise around the fleet.

Why the difference in approach?

In Krell v Henry [1903], Lord Justice Vaughn-Williams was of the opinion that frustration of contract was not limited to either the destruction or non-existence of the subject matter of the contract.

The difference in Herne Bay Steamboat Co v Hutton [1903] was that the contract was the main purpose of the contract could still be achieved i.e. to take paying guests for a cruise around the fleet – despite the fact that King Edward VII would not be personally reviewing the fleet due to his unexpected illness.

This difference in approach taken by the Court of Appeal in both cases is sometimes difficult to understand. In Krell v Henry, both parties had clearly intended that the purpose of the contract was to view the coronation procession (which was postponed). Reinforcing this fact, was the fact that the defender was only entitled to use the flat during the daytime.

In Herne Bay Steamboat Co v Hutton, the purpose of the defender in hiring the steamship was to see the naval review, but this was not the purpose of the owners who were not the slightest bit interested why the vessel had been hired.

Lord Justice Vaughn-Williams compared the situation in Herne Bay Steamboat Co to someone who hires a carriage to go and see the Epsom Derby, but the outbreak of some unforeseen epidemic means that the races are cancelled. This makes no difference to the owner of the carriage who will still expect to be paid for the hire of his vehicle.

It will, however, be important to identify the substance or the purpose of the agreement. The cancellation of an event can frustrate the performance of a contract where that event is an absolutely material term of the agreement.

The limits of frustration …

Frustration can only be used to have the contract discharged in situations where neither party is to blame. When one party is to blame for the failure to perform his obligations under the agreement, this represents a breach of contract and the innocent party can raise the appropriate action.

Tsakiroglou v Noblee Thorl GmbH [1961] 2 ALL ER 179 the sellers had agreed to transport Sudanese ground nuts from Port Sudan in the Red Sea to Hamburg in Germany. The ship was to take the fastest route to Europe through the Suez Canal. This proved to be impossible because the Canal was closed as a result of military hostilities following the Anglo-French-Israeli invasion of Egypt causing the Suez Crisis in late 1956. The sellers would have to ship the goods around the alternative route of the Cape of Good Hope in South Africa. This meant that the distance the ship had to travel from Port Sudan to Hamburg was greatly increased and this would also mean a dramatic increase in the costs of carriage in respect of the goods.

Held: by the House of Lords that a party will still have a duty to perform a contract even if this means that performance is more difficult or expensive than was originally intended by the parties. The closure of the Suez Canal did not mean that the sellers’ duties were discharged by reason of frustration of contract.

Contracts for personal services

Such a contract is discharged by the death of the person who was to perform it. The incapacity of a person who is to perform a contract may discharge it. However, temporary incapacity is not enough unless it affects the performance of the contract in a really serious way. If an employee is killed or permanently incapacitated, it will be very difficult to argue that the employment contract should be allowed to continue. Employees who have had a lengthy prison sentence imposed on them by a criminal court may find it very difficult to argue against the employer’s proposition that the contract of employment has been terminated by reason of frustration.

Some words of warning: the courts may be unwilling to use frustration as a means of terminating an employment contract if other ways of achieving this result are available. This could occur in situations where it is possible for the employer to dismiss the employee entirely fairly by reason of a lack of capability (e.g. on grounds of ill health) as per the Employment Relations Act 1996.

Notable cases on frustration in connection with employment contracts include the following:

  • Davis Contractors Ltd v Fareham UDC [1956] AC 696
  • Marshall v Harland & Wolff [1972] IRLR90
  • G F Sharp & Co Ltd v McMillan [1998] IRLR 632

The purpose of the contract becomes impossible to perform

As we have seen, a situation involving the physical destruction of the subject-matter of the contract will discharge the parties from performance of their duties by reason of frustration. However, frustration can also occur in situations where physical destruction of the subject-matter of the contract may not be the issue.

Jackson v Union Marine Insurance Co (1874) LR 10 CP 125 the pursuer owned a ship which had been chartered to go with all possible speed from Liverpool to Newport for the purpose of loading a cargo bound for San Francisco. The pursuer had insurance with the defenders to protect himself in the event that the charter might be prevented from being carried out. The vessel was stranded whilst on its way to Newport. It was not refloated for over a month and could not be properly repaired for some time. The charterers hired another ship and the pursuer turned to the insurers. They suggested that the pursuer should sue the charterer for breach.

Held: the fact that the ship was stranded effectively frustrated the agreement’s commercial purpose and, therefore, the charterers were free to go elsewhere. The pursuer had no remedy against the charterers and was in turn entitled to seek compensation under the insurance policy.

Illegality

We are seeing the introduction of emergency powers legislation across the World in response to COVID-19 and this will undoubtedly have a huge impact on a range of contractual obligations. Many European Union countries have reintroduced border controls and curbs on free movement of persons which would normally be a clear breach of European Treaties (e.g. the Treaty on the Functioning of the European Union; the Treaty on European Union; and the Schengen Agreement), but these are not normal times. These drastic measures can all be justified on grounds of public security and public health – legitimate derogations or grounds for withdrawal from key EU legal principles. Travel and tourism will obviously be disproportionately affected by these restrictions.

Contracts can become illegal because Parliament introduces legislation to this effect. After the murder of schoolchildren and a teacher at Dunblane Primary School in 1996 by Thomas Hamilton, the British government made it illegal to own particular models of firearms. Therefore, anyone who entered a contract to purchase firearms shortly before the legislation was introduced could not force the supplier to perform the contract. If the buyer insisted on performance of the contract by the seller, the seller would be complying with his contractual duty, but he would also be breaking the law as the contract would be illegal.

Events can also make further or future performance of contracts illegal e.g. the outbreak of war. Two House of Lords’ decisions are excellent authority for this proposition –

Stevenson & Sons Ltd v AG für Cartonnagen Industrie (1918) AC 239 an English company, Stevenson, was in partnership with a German company acting as a sole agent to sell the German company’s goods. By continuing to carry on business with an enemy during wartime (the First World War had broken out), Stevenson would be committing a criminal act and there was no alternative but to have the partnership dissolved (see also Cantiere San Rocco SA v Clyde Shipbuilding & Engineering Co Ltd (1923) SC (HL) 105 where, again, the First World War had a similar effect on a contract between a Scottish company and an Austrian buyer of a ship).

Conclusion

The Coronavirus or COVID-19 is not merely a health issue – it has also become something of a legal minefield for society. This is where knowledge of the circumstances of termination of contractual obligations and performance is vital. The doctrine of frustration, impossibility and supervening illegality are highly relevant to this debate.

Doubtless, the use of force majeure clauses will become more common – especially, if as predicted, we are going to be experiencing further waves of disruption due to this pandemic.

Related Blog Articles:

https://seancrossansscotslaw.com/2019/02/10/frustration-of-contract/

https://seancrossansscotslaw.com/2019/03/25/locking-horns-frustration-of-contract-part-2/

https://seancrossansscotslaw.com/2019/11/23/pay-up-or-frustration-of-contract-part-3/

https://seancrossansscotslaw.com/2019/08/28/stormy-weather-im-at-the-end-of-my-tether/

https://seancrossansscotslaw.com/2020/02/25/welcome-to-austria/

Copyright Seán J Crossan, 18 March 2020

Sick Pay? (or the Coronavirus Conundrum)

Photo by Macau Photo Agency on Unsplash

Coronavirus (COVID-19) isn’t just a potential threat to your health; it could also mean that your earnings take a hit.

How so?

If you have to take time off from work (i.e. self-isolate yourself) because you have (or might have) been infected by the virus, will you be entitled to receive sick pay from the organisation that you are working for?

It depends very much on your employment status …

… if you are a zero hours worker or genuinely a self-employed person, the answer is an emphatic no.

If you are deemed to be an employee (an individual who works under a contract of service) within the meaning of Section 230 of the Employment Rights Act 1996, you may be fortunate in that you have an entitlement to receive either contractual sick pay or statutory sick pay.

Contractual sick pay

If a contractual sick pay scheme applies to your employment, you might receive, at its fullest extent, 6 months full pay and then 6 months at half pay. This generous arrangement, of course, will not apply from day 1 of the employment and employees will have to build up their continuous service in order to be eligible for the maximum level of contractual sick pay. It is probably the case that an employee with just over a year’s service would receive 1 month at full pay for sickness absence and then 1 month at half pay.

An example of entitlement to contractual sick pay arrangements taken from the Collective Agreement (the National Working Practices Agreement) between Scottish Further Education lecturers and their employers can be seen below:

Statutory sick pay

What about statutory sick pay or SSP? This is relevant in situations where employees are not entitled to receive contractual sick pay.

It’s also worth pointing out that contractual sick pay is often much more generous than SSP and, even then, not all employees will be entitled to receive this benefit because they fall outside the eligibility criteria. The current weekly rate of sickness pay (in March 2020) is £98.25 and could be paid by employers for a maximum of 28 weeks.

Ordinarily, it becomes payable only from 4th day of sickness absence, but as of Wednesday 4th March 2020, the UK Government has announced that employees who self-isolate themselves because of suspected Coronavirus infection, will be paid SSP from day 1 of their sickness absence.

This is a temporary measure which will apply only for the duration of the current COVID-19 emergency, but people who are off sick with a medical condition other than the virus will also be entitled to benefit from these changes.

See links below to articles on the BBC website about sickness pay entitlement and COVID-19:

https://www.bbc.co.uk/news/business-51628524

https://www.bbc.co.uk/news/uk-51738837

The change in Government policy will not be extended to the self-employed; and to zero hours workers (who will not be able to meet the threshold conditions for eligibility). Frances O’Grady, the General Secretary of the UK’s Trades Union Congress (TUC) has stated that as many as 2 million workers may not be eligible for SSP under the current system.

There has been some concern expressed that individuals in these categories may continue to go to work – if they have the virus or suspect as much – because they will not receive SSP during their absence.

Eligibility criteria for SSP

In 2019-20, in order to qualify for SSP you must be an employee earning at least £118 per week or £512 per month (before tax). This is known as the Lower Earnings Limit.

In April 2020, SSP will rise to £95.85 per week, but individuals’ earnings must fall within any of the following bands in order to qualify:

  • £120 per week
  • £520 per month
  • £6,240 per year

Again, this will mean that many zero hours contract workers will simply fail to qualify for SSP payments.

More problems …

There is also another complication concerning eligibility for sickness pay which the COVID-19 outbreak has raised:

Let’s assume that you do qualify for either contractual sick pay or SSP, but you have decided to take the precautionary measure of self-isolation so as not to expose your colleagues to potential risk.

It may be that you have recently returned from a destination such as China or Italy where the virus has been particularly prevalent and you decide to play it safe by not going into work. You contact your HR Department or employer to inform them of your decision; you are thanked for being extremely considerate and responsible; and then you are told that you are not entitled to receive sick pay because you haven’t actually been diagnosed with the virus.

Matt Hancock MP, UK Government Minister for Health, thinks that current legislation does cover such situations and individuals who take precautionary measures, as outlined above, should benefit from sick pay provisions.

With all due respect to Mr Hancock, what he thinks and what current legislation or a contract of employment states might be entirely different realities. That said, Mr Hancock does have the support of the highly regarded Advisory Conciliation and Arbitration Service (ACAS) which is recommending that employers pay self-isolating employees who have taken such a precautionary measure (see link below).

https://www.acas.org.uk/acas-publishes-new-advice-on-handling-coronavirus-at-work

Conclusion

Clearly, COVID-19 is presenting a number of challenges to traditional practices or orthodoxies in the field of employment law. This is a serious issue given that recent estimates are predicting that up to 20% of the UK workforce could be in danger of contracting the virus and, consequently, they will be absent from work.

In some respects, the UK Government has been caught napping on the issue of extending employment protection e.g. entitlement to sick pay to people who do not have a contract of service and the COVID-19 outbreak has really exposed this shortcoming.

As Jonathan Rennie of law firm, TLT, had noted (as recently as this week) the UK Government has failed to implement any of the recommendations of the Taylor Review which favoured extended employment protection to workers who did not have a contract of service. It is somewhat ironic that the virus outbreak has forced the Government to break cover and extend some employment protection rights.

A link to an article on the BBC website about the predicted impact of COVID-19 on the UK workforce can be found below:

https://www.bbc.co.uk/news/uk-51718917

Copyright Seán J Crossan, 4 March 2020

Locking horns (Frustration of Contract Part 2)

Photo by Uriel Soberanes on Unsplash

In February, one of my blogs (Frustration of Contract) dealt with the circumstances surrounding the issue of frustration as a factor which could lead to termination of a contractual agreement.

One of the stories discussed in that particular blog was the dispute between Cardiff City FC and FC Nantes in respect of the tragic death of Emiliano Sala, the Argentinian footballer who had signed for the English Premiership club.

Despite Sala’s death, the French club was till demanding a portion of the transfer fee of £15 million. This led to speculation on my part as to whether frustration of contract could be an argument put forward by Cardiff.

The plot has since thickened an, today (25 March 2019), it has been reported that Cardiff City is now claiming that the transfer deal was never legally binding. The Premiership side asserts that the proper paperwork was not completed; the French side disputes this.

So, it looks as if the two clubs are going to be locking horns in what now seems to be an inevitable legal dispute.

A link to an article on the BBC website can be found below:

saw this on the BBC News App and thought you should see it:

Emiliano Sala: Cardiff set to claim transfer deal ‘not legally binding’

Cardiff City football are set to tell Fifa the deal to buy Emiliano Sala from Nantes for £15m was not legally binding.

Copyright Seán J Crossan, 25 March 2019

Related Blog Articles:

https://seancrossansscotslaw.com/2019/03/25/locking-horns-frustration-of-contract-part-2/

https://seancrossansscotslaw.com/2019/11/23/pay-up-or-frustration-of-contract-part-3/

https://seancrossansscotslaw.com/2019/08/28/stormy-weather-im-at-the-end-of-my-tether/

https://seancrossansscotslaw.com/2020/02/25/welcome-to-austria/

https://seancrossansscotslaw.com/2020/03/18/crazy-days-force-majeure-frustration/