Finding Refuge under Force Majeure or Frustration

Dushinka Nelson, LLB (London), Attorney-at-Law

Dr. Asanga Gunawansa, PhD (NUS); LLM (Warwick), Attorney-at-Law1

Introduction
This article will discuss the origins, development and differences of the doctrines of force majeure and
frustration, and their application in the construction industry with specific reference to relevant
clauses in FIDIC and ICTAD Standard Form Contracts.
Parties enter into contracts with the intention of performing their respective obligations under and in
terms of the agreed terms and conditions in the contracts. In particular in contracts used in the
construction industry, it is not unusual to find very elaborate clauses dealing with force majeure, which
seek to excuse parties from non-performance due to reasons beyond their control. A nonperformance by either party to a contract would be deemed a breach of contract. However, if
circumstances are such, that performance of obligations by one or more parties to a contract becomes
impossible by no fault of their own, the doctrine of force majeure applies.
The jurisprudence or rationale of a force majeure is that, where parties are unable to perform the
obligations as set out in a contract, the clause of force majeure found in the contract would excuse
the parties from performance and set them free from being found to be in breach of the contract. It
is important however to understand the difference between impossibility of performance due to force
majeure and the difficulty in performing a contract due to events of frustration.
The doctrines of force majeure and frustration are similar to the extent that, a contracting party could
have successful recourse to either doctrine to determine the contract, and be excused from further
performance. However, unlike in the case of force majeure, where it is necessary for the parties to
have agreed in the contract concerned as to what constitutes force majeure, frustration does not
require an explicit provision in the contract. This is because frustration is concerned with the incidence
of risk for unforeseen, supervening events that have occurred without the fault of either party such
that the nature of the contract has become so radically differently that the performance of the
contractual obligation would be fundamentally different from the obligations initially contemplated
and undertaken, and as such it would be unjust to hold the parties to their initial contractual
obligations.

The authors are members of the Colombo Law Alliance - http://www.colombo-law.com/

Thus, for instance, in a contract, parties could agree to incorporate a force majeure clause consisting
of acts of god (natural events beyond the control of the parties), war, riots etc. as events due to which,
if the contract is terminated or performance under the contract is delayed, the party or the parties
concerned should not be held liable to pay damages. On the other hand, even in the absence of a force
majeure clause, performance of a contract could be made so difficult or impossible, thus making it be
unjust to hold the parties to their initial contractual obligations, the affected parties could find refuge
under the doctrine of frustration. A good example is the situation in which a foreign buyer and a Sri
Lankan seller who have signed an agreement to sell a land in Sri Lanka would find themselves in as a
result of the Land (Restriction Alienation) Act No. 38 of 2014 which inter alia makes it illegal to alienate
land on freehold basis to foreign nationals. Faced with such a situation, the Seller could argue that he
is unable to perform the contract as a result of frustration.

The Origins of Force Majeure and Frustration

The origins of Force Majeure dates back to the 1800s and can be directly traced to the French Code of
Napoleon, now the French Civil Code. The original provision, "Impossibilit absolute de remplir ses
obligations due un vnement imprvisible, irrsistible et extrieur", loosely translated to English
means, an event that is unforeseeable, unavoidable and external that makes execution impossible.2
France is considered to be a Civil law jurisdiction and hence it can be concluded that force majeure
clauses have a civil law jurisdictional origin.
The similar concept to force majeure that originates from Common Law jurisdictions, is the doctrine
of frustration. As explained in the introduction above, the doctrine of frustration comes into effect
when performance of a contract has become radically different from the intentions of the parties.
According to Chittys treatise on contract law, a contract may be discharged on the ground of
frustration when something occurs after the formation of the contract which renders it physically or
commercially impossible to fulfil the contract or transforms the obligation to perform into a radically
different obligation from that undertaken at the moment of the entry into the contract.3 Thus,
Frustration may occur in situations where the subject matter is lost or destroyed or due to a
supervening event where the performance is impossible. However, it must be duly noted that, courts
are reluctant to grant the remedy of frustration easily and will require the parties to adduce strong
and cogent evidence to that effect.

2
3

French Civil Code, arts 1147 and 11248 (30 August 1816, re-printed 1991).
Chitty on Contracts, 29th edition at 23-001.

In England, the House of Lords have held that that the test for frustration is objective, i.e. it is not a
subjective inquiry into the actual or presumed intentions of the parties.4 Further, unlike in the case of
force majeure, where whilst the performance of the contract may be delayed, which may or may not
eventually lead to termination, the English common law view is that frustration operates automatically
(i.e. without the choice or election of either party) and totally, resulting in the obligations of both
parties being wholly discharged in so far as performance of them had not fallen due when the contract
was frustrated.
Commercial impracticability is a similar doctrine present in US jurisprudence that will not be
discussed in detail in this article.

The Modern Use of Force Majeure

Originally, Force Majeure clauses only included acts of gods (which typically covered adverse weather
and natural catastrophes). Today, the use of force majeure has evolved to include unforeseen acts of
governmental or regulatory authorities and non-natural events. The modern commercial trends, the
wider range of circumstances concerning the commercial possibility and commercial practicality of
performance has led to this expansion of the doctrine.
Thus, a typical force majeure clause might read as:

act of God (such as, but not limited to, fires, explosions, earthquakes, drought, tidal waves and floods);
war, hostilities (whether war be declared or not), invasion, act of foreign enemies, mobilisation,
requisition, or embargo; rebellion, revolution, insurrection, or military or usurped power, or civil war;
contamination by radio-activity from any nuclear fuel, or from any nuclear waste from the combustion
of nuclear fuel, radio-active toxic explosive, or other hazardous properties of any explosive nuclear
assembly or nuclear component of such assembly; riot, commotion, strikes, go slows, lock outs or
disorder, unless solely restricted to employees of the Supplier or of his Subcontractors; or acts or threats
of terrorism.
The scope of Force Majeure clauses have been dealt with in several key cases globally. In Caltex Oil v
Howard Smith Industries Pty Ltd.5, Reynolds J stated that the phrase "other circumstances beyond the
control of the parties" would include an industrial strike. The Australian unreported case of Asia Pacific
Resources Pty Ltd v Forestry Tasmania (No. 2)6 addressed the issue of, whether a party could rely on a
force majeure clause where both parties in fact, had knowledge of such event, or the possible

Davis Contractors Ltd v Fareham U.D.C. [1956] A.C. 696, at 728 (per Lord Radcliffe)

[1973] 2 NSWLR 89

(1998) Aust Contract R 90-095; (Supreme Court of Tasmania

occurrence of such. Court held that, as a general rule, a party cannot invoke a force majeure clause in
such instances.
However, this case must be contrasted against Reardon Smith Line Ltd v Ministry of Agriculture,
Fisheries and Food7 where it was held that, there was no settled rule of construction that prevents a
party to a force majeure clause from relying on events in existence at the time the contract was
entered into as events beyond that partys control.

Settling the law in Trade and Transport Inc. v Lion Kaiun Kaisha Ltd, The Angelia8, Kerr J referred to
Reardon Smith9 and stated that, ordinarily a party would be debarred from relying upon a pre-existing
cause as an excepted peril if:
(i) The pre-existing cause was inevitably doomed to operate on the contract;
(ii) The existence of facts that show that the excepted cause is bound to operate, is known to the
parties at the time of contract, or at least to the party who seeks to rely on the exception;
Court, adding an alternative to (ii); stated,
(iii) If the existence of such facts should reasonably have been known to the party seeking to rely upon
them and would have been expected by the other party to the contract to be so known.

Given the above, it seems that, causes beyond the control of the parties that were known at the date
of contracting may excuse performance only where they were of a temporary nature and are not
doomed to operate on the contract. However, a contract becoming merely commercially
uneconomical will not be considered to be a circumstance beyond the control of the parties as was
held in the Australian decisions of Gardiner v Agricultural and Rural Finance Pty Ltd10 citing Hyundai
Merchant Marine Co Ltd v Dartbrook Coal (Sales) Pty Ltd11. A similar view was taken by the High Court
of Singapore in Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd, where a contractor
pleaded to be excused from performance when as a result of the ban on the export of sand imposed

[1962] 1 QB 42

[1973] 2 All ER 144

Ibid 4

10

(2008) Aust Contract R 90-274; [2007] NSWCA 235

11

(2006) 236 ALR 115

by the Government of Indonesia, it became uneconomical to purchase sand for construction projects
from elsewhere.12
In cases concerning a commercial aspect, case law suggests that, there must be 3 underlying factors
in order for a party to rely on force majeure clauses13:

It must occur with or without human intervention.

It must not have been reasonably foreseen by the parties.

It must completely have been beyond the parties' control and it must not be preventable.

In Matsoukis v Priestman14, a case concerning the dislocation of business owing to a universal coal
strike, was held to amount to a force majeure. However, in cases having a commercial importance, it
is of paramount interest for the parties to show that the impediment is something of a legal or physical
nature and not a mere economic one.

Modern use of Frustration

In the case of National Carriers Ltd v. Panalpina (Northern) Ltd.15, where Lord Simon stated that
frustration takes place when, due to a supervening event (without default of either party) which so
significantly changes the nature (not merely the expense) of the outstanding contractual rights and/or
obligations from what the parties reasonably have contemplated at the time of the literal sense of its
stipulation in the new circumstances thus discharging both parties from further performance, the
courts devised the modern test which is currently used for assessing whether or not the doctrine of
frustration ought to apply . The test requires the establishment of the following:
-

There must be a supervening event that "significantly changes the nature (not merely the
expense or onerousness) of the outstanding contractual rights";
There must be no fault in either party;
The supervening event must not have been "reasonably contemplated by the parties" at
the time of the contract;
It must be unjust to hold the parties to the original contract.

12

[2013] SGHC 127

13

Damian Mc Nair, Force Majeure Clauses, Asia Pacific Projects Update, 2011.

14

[1915] 1 KB 681 at 687

[1981] AC 675

15

In accordance with this test, the courts adopt an approach whereby they seek to interpret the contract
in light of the surrounding circumstances. This approach is aimed at discerning the parties true
intentions when entering the contract. The rationale is that the court shall then be better placed to
conduct an assessment of contract in order to conclude whether or not the supervening events had
changed the circumstances making it impossible to perform the outstanding obligations.

Force Majeure and Frustration under FIDIC and ICTAD

FIDIC
Clause 19.1 of the new FIDIC Red Book defines a force majeure event as one:
a)

which is beyond a Party's control,

b) which such Party could not reasonably have provided against before entering into the

Contract,
c)

which, having arisen, such Party could not reasonably have avoided or overcome, and

d) which is not substantially attributable to the other Party.

Force Majeure may include, but is not limited to, exceptional events or circumstances of the kind listed
below, so long as conditions (a) to (d) above are satisfied:

munitions of war, explosive materials, ionising radiation or contamination by radioactivity,

except as may be attributable to the Contractor's use of such munitions, explosives, radiation
or radioactivity, and;

riot, commotion, disorder, strike or lockout by persons other than the Contractor's Personnel
and other employees of the Contractor and Sub-Contractors,

natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity.

war, hostilities (whether war be declared or not), invasion, act of foreign enemies,

rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war,

The compensation available for a Contractor who suffers delay and/or costs and invokes a force
majeure clause is stated in Clauses 19.4 and 19.6 of the FIDIC Red Book. Clause 19.4 states that, a
Contractor can claim for an Extension of Time for Completion and for the payment of costs for any
event occurring under clause 19.1 mentioned above. Clause 19.6 provides that, if the substantial
execution of works is being prevented for a period of 84 consecutive days or multiple periods which
total over 140 days, then either party may give notice of termination to the other. The termination is

due to take place 7 days after the notice has been given. Upon such a termination, the Engineer must
determine the value of the work done and issue a payment certificate. Clause 19.7 further provides
for a release of performance for circumstances outside the control of the parties even if such is not
considered a Force Majeure.
Thus, as far as FIDIC is concerned, the force majeure clause provides for excusing the party affected
due to default for example by enabling such party to seek extension of time without being penalised.
In addition, it provides for termination of contract due to substantial execution of works being
prevented for a period of 84 consecutive days or more, or for multiple periods which total over 140
days. Thus, not only extension of time for performance, but also termination rights are granted in
appropriate circumstances due to force majeure.
FIDIC, like most contracts do not have (no need to have) a specific clause dealing with frustration. As
explained above, frustration is a common law concept and shall be applicable even in the absence of
a specific clause providing for the same. Thus, in the context of FIDIC, frustration may still be used
when a supervening event happens after signing the agreement to discharge the remaining obligations
of the parties, provided that, the event concerned satisfies the aforesaid test developed in the case of
National Carriers Ltd v. Panalpina (Northern) Ltd. If a party can successfully establish that an event
relied on by the party satisfies the said test, then being discharged from contractual obligations is
possible without having to satisfy that the substantial execution of works is prevented for a period of
84 consecutive days or more, or for multiple periods which total over 140 days.

ICTAD
Force Majeure under ICTAD contracts have a very similar, almost identical definition to FIDIC contracts
under clause 20.1 of the ICTAD Standard Bidding Document, Procurement of Works, Major Contracts
(ICTAD/SBD/02). The compensation available for a Contractor suffering delay and/or costs under an
ICTAD contract too are very similar to that of a FIDIC contract as explained in clause 20.4 of
ICTAD/SBD/02.
Similar to FIDIC contracts, ICTAD contracts allow for an optional termination and the issuance of
payment certificates by the Engineer for the value of work done, under clause 20.6. Clause 20.7, once
again similar to FIDIC contracts, provides for a release of performance for circumstances outside the
control of the parties.

Thus, under ICTAD too, even in the absence of a specific clause providing for frustration as a ground
of discharging the outstanding contractual obligations, parties could successfully argue that due to a
supervening event the performance of obligations have become near impossible and thus, the parties
should be discharged from their obligations, provided that they satisfy the aforesaid test developed
in the case of National Carriers Ltd v. Panalpina (Northern) Ltd.

Should Compensation Be Paid to a Contractor when a Contract is terminated due to Force Majeure
or Frustration?
Upon analysing the nature and scope of force majeure clauses, it is important to discuss the
compensation payable to the parties (if any). Logically, since a force majeure is an event that is not
within the control of either of the parties, no compensation should be payable to either party. In fact,
if a party was liable to pay compensation to the other, then it would not be a force majeure, but
ideally, a breach of contract by that party. However, though this is so, in reality, upon the occurrence
of a force majeure event, some kind of loss is incurred by the parties and this cost must be shared or
allocated between the parties.
Force majeure provisions will be construed strictly and in the event of any ambiguity the Contra
Proferentem rule will apply. Contra Proferentem literally means "against the party putting forward".
In this context, it means that the clause will be interpreted against the interests of the party that
drafted it. The parties however, may contract out of this rule.
The rule of Superior Risk Bearer introduced in the 1970s is important in this regard16. This rule
proposes the allocation of a larger burden of the loss on the stronger party, thereby compensating the
other, the weaker party. This rule is derived from the power of the courts to fill gaps or imply terms
into a contract (known as gap-filling terms).17 These are terms that the parties would have expressly
adopted had they been negotiated. This is similar to the Moorcock18 test or the reasonable by-stander
test or the business efficacy test. The jurisprudence of these tests are that, if the attention of the
parties had been drawn to this issue, the parties would have included such a term in the agreement,
as it would be considered, an obvious term.

16

Posner/Rosenfield, impossibility and related doctrines in Contract Law, an Economic analysis, J. Legal Stud.
6, (1977), (83-118)
17
Christoph Bruner, Force Majeure and Hardship under General Contract Principles Exemption for nonperformance in International Arbitration, 2009, Kluwer Law International, Pg.144
18
(1889) 14 PD 64

Which party would be the Superior Risk Bearer would then be the bigger question. The answer to this
depends on the status of the parties at the time of contracting. The availability of an insurance policy
for a party would be one of many factors that the court would consider when deciding the matter.
Further, according to the concept of surrogate benefit, the obligee is able to claim from the excused
obligor from an insurance policy as a result of a Force Majeure event, provided the obligee renders its
own performance by paying the agreed price.
In PPP (Public Private Partnership) contracts, the rationale is that, since the playing field is uneven,
since the Grantor is of much larger size (very often a Government entity), the Grantor must bear the
cost and compensate the Private party (the Contractor)19.
This rule has its inherent disadvantage; the vagueness and ambiguity present in the rule. Parties will
encounter great difficulty in attempting to ascertain the judicially implied terms for business efficacy.
It is natural that neither party will prefer to be the Superior Risk Bearer! In practice, this would result
in lengthy, costly and cumbersome litigation with the objective of obtaining an interpretation
favourable to the respective party20.
However, it is tantamount that the party being compensated show that all necessary steps to mitigate
loss flowing from the Force Majeure event was taken21.
Unlike in the case of force majeure, there is no entitlement for compensation in the case of frustration.
If it is established that there has been a frustrating event, then the contract stops from that moment
on, thus, the loss lies where it falls. What this means is that all obligations up to the moment of
frustration are enforceable and that all obligations relating to performance after that moment are no
longer binding. It is important to note here that despite frustration discharging the obligations of the
parties, thus bringing the contract to an end, some clauses contained in the contract such as the one
providing for confidentiality and the arbitration clause survives frustration. Thus, a claim for
outstanding payments for work done up to the time of frustration could be referred to arbitration, if
not settled.
If the contractor is permitted to do further work after the frustrating event, then, a new agreement
will have to be entered into between the parties, since the old one stands terminated. However, if in
the absence of a new contract, the contractor is required to perform works, then the contractor is not
doing work pursuant to the old contract. Nevertheless, the contractor must be paid a fair
19

World Bank Resources, 2015, Accessed on 03-12-2015, [http://ppp.worldbank.org/public-privatepartnership/ppp-overview/practical-tools/checklists-and-risk-matrices/force-majeure-checklist]

20
Ibid 7 pg. 145

remuneration for any work done, on the basis of quantum meruit or restitution. This may be more or
less than the contract rate.

Conclusion
In conclusion, it must be stated that, force majeure clauses have come a long way, beginning as mere
Acts of God clauses to clauses that have business efficacy integrated into it. The definitions of force
majeure clauses however, must address the specifics of the product as opposed to a general template.
Indeed, it has been held, in the case of British Electrical and Associated Industries (Cardiff) Ltd v Patley
Pressing Ltd.,22 that a clause referring to "the usual force majeure events" may be void for uncertainty.
The case for the payment of compensation to the Contractor, merely on the basis that the other party
had greater power and wealth at the time of contracting might be flawed in terms of business efficacy
and common sense. Such a notion would undermine or discourage the powerful and wealthy from
entering into commercially risky contracts.
As far as frustration is concerned, as explained above, there need not be any contractual entitlement
to plead frustration as it is a common law right. However, in order to seek refuge under frustration,
parties must first satisfy the test established in the case of National Carriers Ltd v. Panalpina (Northern)
Ltd., which may not be easy.
__________________________________________________________________________________

22

(1953) 1 WLR 280