Economic climate excuse for contractual breach or termination?
GOLD GROUP v BDW [2010]
Perhaps not surprisingly, the Courts have seen a number of cases in which contracting parties have sought to invoke the current economic difficulties as constituting force majeure and therefore excusing contractual breaches or even ‘frustrating’ a contract.
facts:
The parties had entered into a property development joint venture. However, the substantial fall in property prices made the agreed allocation of sales revenue much less attractive to the developer. After unsuccessfully trying to renegotiate, the developer walked away claiming that the agreement had been discharged by frustration.
decision:
The Court dismissed the frustration argument, which only applies where the contract is impossible to perform or its performance as contemplated when the contract was formed has significantly changed. The developer was therefore held to be in breach by failing to complete the work. The Court found that the parties had foreseen that a drop in property prices was a possibility and the development agreement even anticipated what should happen in such circumstances.
point to note:
The key thing to note was that the contract was still perfectly capable of being performed and hence the frustration angle did not work.
TANDRIN v AERO TOY STORE [2010]
facts:
In another case featuring this issue, one of the parties tried a different tack. ATS agreed to buy a multi-million pound aeroplane from T but was unable to obtain financing and sought to claim that an “unanticipated, unforeseeable and cataclysmic downward spiral of the world's financial markets" triggered the force majeure clause in the purchase contract, permitting ATS to defer acceptance of and payment for the aeroplane.
decision:
- The High Court rejected this argument. To do so it had to interpret the clause in question, which was drafted somewhat strangely. Although it purported to excuse either party in the event of force majeure, it then had a list of examples of qualifying events followed by the cover all "any other cause beyond the seller's reasonable control”. Since the clause specifically referred to events primarily impacting the seller rather than the buyer, the Court felt the clause did not cover the situation that had occurred.
- The Court also did not deem any of the events preceding the phrase to be connected to the economic downturn. It is a general principle of English law that a force majeure event does not include a change in economic and/or market circumstances affecting the profitability of a contract or the ease with which the parties' obligations can be performed.
points to note:
- This is an example of a situation where a list of quoted examples in a clause can taint the interpretation of any general wording which is also used. This may be a justification for not including a list of examples at all or, at the very least, inserting “including, but without limitation’” type wording to give the Court greater flexibility with interpretation. The Court also dismissed an argument based on frustration.
- Whether a force majeure clause in a contract is triggered depends on the proper construction of the wording of the specific clause. The clause did not state that economic circumstances were to be treated as an event of force majeure, hence there was no basis to interpret the provision as if it did.
- The Courts are therefore pretty clear in this area. Contracting parties cannot readily use the excuse of the impact of the economic climate to escape from a binding contractual commitment. If a change in economic conditions might conceivably affect a contract or your ability to perform it, the issue should be dealt with expressly in the contract at the outset.