Posted: Thursday, 6 May 2010 @ 11:47
The costs of the Icelandic volcano which bought UK airports to a standstill over the past weeks are still being counted. Not only were travellers affected but also all businesses engaged in importing and exporting goods by air. Ryanair tried and failed to renege on their contractual duties by claiming they would only refund the amount paid for a ticket instead of covering the costs for accommodation incurred by their stranded passengers.
So what is the legal position when it becomes difficult or impossible to perform a contract?
Although the usual rule in commercial contracts is that they must be performed, if something unforeseen has happened since the contract was agreed, then in certain circumstances (called “frustrating events” by the courts), businesses are free not to continue with the contract.
As can be expected, only certain events are legally classed as frustrating ones:
- When it’s impossible to perform the contract – e.g. a person vital to the contract has died or has been rendered incapable of performing the contract.
- Destruction of the subject matter – e.g. if you have agreed to sell your vintage Bentley and it is destroyed by fire.
- Frustration of purpose – e.g. in 2008 the Royal International Air Tattoo was cancelled due to unforeseen and unprecedented weather conditions. Thousands had booked accommodation to attend the event. As many hoteliers knew that the sole purpose of the booking was associated with the event, then deposits had to be refunded.
- Government Intervention – e.g. where Parliament brings in new laws which make a contract illegal or affect its performance.
If performing a contract becomes much more difficult or expensive than you expected, then this will not be enough to let the parties off the hook. Nor will unusual or unforeseen acts of nature.
It is good practice for businesses to specify as a contractual term what events will frustrate a contract and exactly what the consequences will be. The courts will follow terms specifically written into a contract.
These terms are known as ‘Force Majeure’ clauses. They allow the parties to back out of a contract in circumstances such as ‘Acts of God’, war, riot, labour disputes, failure of communications, and failure of vital utility services. ‘Acts of God’ are extraordinary physical circumstances, such as the eruption of the Icelandic volcano, which could not have been foreseen and could not have been guarded against.
Cousins Business Law advice
If you can’t perform a contract, take advice as soon as possible on whether you can get out of it. A good business dispute management lawyer should be able to advise you on tactics you can use to get out of a contract with the minimum cost possible to your business.
When drafting contracts, take advice on whether you should have a Force Majeure clause in it.
Check your insurance cover for risks you deem unacceptable. Many insurance policies exclude liability for losses caused by Acts of God, war, riot, and labour disputes.
Blog by Nigel Musgrove
Nigel has been providing dispute resolution advice as a solicitor for over 35 years. As well as advising SMEs and business owners on disputes he also offers a specialist licensing law service. View profile
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