Frustration, Force Majeure & Risk: Lessons for Business in Uncertain Times

Why is a force majeure clause so important?

A “force majeure” clause is a provision addressing the parties’ rights and obligations if circumstances beyond their control (such as pandemics, wars, industrial action, and natural disasters) impact or prevent performance.

If you want to effectively allocate commercial risk in a contract, then you need a well drafted force majeure clause. It will not be implied.

The closest concept in common law is the doctrine of frustration. Broadly, this applies when something occurs after a contract is formed which renders it incapable of being performed or transforms what is required for performance into something radically different from what it was at the time of entering the contract.

Frustrated contracts are hardly the friend of any good risk management policy. They result in:

• the contract being brought to an end by operation of law from the occurrence the event; and
• losses generally falling where they lie at the time subject to applicable statutory rights such as under Part 3.2 of the Australian Consumer Law and Fair Trading Act 2012(Vic) in Victoria.

Foster & Sieker v Theodor

Foster & Sieker v Theodor concerns a 2020 accommodation booking impacted by Covid -19 restrictions. It is a case of a force majeure provision gone wrong. The Tribunal instead found the contract to have been frustrated by an entirely foreseeable event that could have been easily dealt with.

What happened:

1. Forster and Seiker first enquired with Theodor on Airbnb. At the time, Airbnb’s terms expressly stated that its “Extenuating Circumstances Policy” would no longer apply because “COVID-19 and its consequences were no longer unforeseen or unexpected.”
2. They were directed to Theodor’s independent site and clicked to accept the site terms whilst booking. The site terms were alleged to have included a booking and cancellation policy stating inter alia that:

“…we do not cover for extenuating circumstances such as natural disasters, pandemics, government restrictions on home gatherings, acts of god [sic], force majeure events or other circumstances that may force you to cancel your accommodation…” (force majeure provisions)

3. After changing to a different accommodation type over the phone, Forster and Seiker were emailed a “Welcome Pack”. It included another set of terms and conditions which were silent as to force majeure issues.
4. As the travel dates approached, Stage 3 Covid-19 restrictions came into effect and the accommodation dates were moved by agreement.
5. As the new dates approached, Stage 4 Covid –19 restrictions came into effect. Forster and Sieker asked for their money back. Theodor cited the force majeure provisions but also offered a change of date or 50% refund.

What was wrong with the force majeure provisions?

On the facts, the Tribunal didn’t accept that the force majeure provisions were included in the contract, but it made clear that even if they were, they would have been ineffective. Applying a very narrow reading “to ensure that the term was objectively intended to deal with the relevant contingency, fully and completely” it was noted that:

1. general references to “pandemic”, “acts of God” and “force majeure events” were not of themselves the events that had precluded performance,
2. the only government restrictions covered were “home gatherings” not travel and or business restrictions; and
3. the clause was limited to where the customer was forced to “cancel”. It failed to address what should occur if performance became impossible and how the contract must be discharged. Neither party had cancelled. On the imposition of the restrictions, it had instead become possible to lawfully perform.

But how can a contract like this be frustrated when the customer agreed knowing that there was a foreseeable risk? 

The Tribunal accepted that the risk of government restrictions was foreseeable but, it applied an approach from The Sea Angel[1] case which treats foreseeability as just one of several factors and of varying contextual importance.

In this context, the Tribunal had “no hesitation” in finding that frustration had occurred. Of relevance, it found that:

1. there was nothing in the express terms showing an intention by either party to assume the risk;
2. neither party evidenced any objective intention to be bound by the contract once the situation rendered performance impossible;
3. Theodor was in a better position to assume the risk than a customer because she could adjust her profit margin;
4. Forster and Sieker had no opportunity to negotiate the terms;
5. Theodor could have chosen to allocate the foreseeable loss by the insertion of an effective force majeure clause. It could have expressly provided for a 50% return of booking money as Theodor had offered Foster & Sieker;
6. a contractual term requiring the whole booking amount be forfeited on a supervening event would have been open to challenge by customers as an unfair contract term under Australian Consumer Law; and
7. permitting Theodor to retain the entire booking amount when she had not performed at all would result in an unjust enrichment.

Theodor was ordered to repay all amounts received in accordance with the Australian Consumer Law and Fair Trading Act 2012(Vic) minus a small allowance for prior expenses. However, as the Tribunal made very clear, a much more commercially acceptable outcome had been achievable with the right contract.

The Commercial Team at Tisher Liner FC Law have extensive experience in commercial contracting. If you require any advice or assistance regarding your contractual arrangements, please do not hesitate to contact a member of our Team.

[1] Edwinton Commercial Corporation & Global Tradeways Ltd v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel) [2007] EWCA Crim 2062

Disclaimer

The above does not constitute legal advice, but is information which may be of general interest. Tisher Liner FC Law will not be held liable or responsible for any claim, which is made as a result of any person relying upon the information contained in this publication.