Russia’s invasion of Ukraine – force majeure and frustration – The English and Norwegian perspective

An option frequently considered in this context is whether a party is entitled to declare force majeure or frustration. We consider these concepts briefly below, in the context of the invasion, from an English and Norwegian law point of view.

The English law position

Force majeure

The doctrine of “force majeure” (“FM”) does not exist as a free-standing concept under English law. However, as a contractual term it is common. A substantial body of case law exists to demonstrate how the courts will deal with FM clauses.

Typically, FM clauses allow a party to suspend (and often, after a set period, cancel) their obligations under a contract provided that:

1. there is a supervening event over which they had no control and which could not reasonably have been foreseen at the time when the contract was made,
2. performance of their contractual obligations is prevented or delayed as a result, and
3. the party relying on the FM clause has taken all reasonable steps to prevent or mitigate the effects of the supervening event.

Contracts often list examples of such FM events, typically war, invasion, blockade, government actions, sanctions, strikes, civil commotion, confiscation, insurrection, fire, explosion and cyberattacks. Several of these may come into play in the current situation.

Ultimately, the effects of a given FM clause, and whether this is ‘triggered’ by the invasion of Ukraine (or any other subsequent event), will depend on the factual circumstances of each case as well as the wording of the particular clause. However, there are general lessons which can be drawn from the English authorities.

FM clauses will always be construed against the party seeking to rely on them. It is therefore for that party to show that the FM event has fulfilled the necessary criteria.

In practice, this will ordinarily involve documenting the obstacles and demonstrating the causal link between the FM event and the operation of the FM clause (e.g. because performance of the contractual obligations by a party has been severely delayed), whilst showing that the FM event was not caused by that party.

In terms of assessing causation, Mr Justice Teare helpfully summarised the authorities in Seadrill v Tullow [2018] EWHC 1640:

“Questions of causation are sensitive to the legal context in which the question arises; see ENE Kos v Petroleo Brasileiro [2012] 2 AC 164 at paragraph 12 per Lord Sumption and at paragraph 76 per Lord Clarke. They are to be resolved by reference to common sense; see The Eurus [1998] 1 Lloyd’s Reports 351 at p.361-2 per Staughton LJ and also ENE Kos v Petroleo Brasileiro at paragraph 74, where Lord Clarke approved a statement in an earlier case that causation was to be determined by a “broad common sense view of the whole position”.”

In this case, the Court held that there were “two effective causes” of the defendant being unable to perform the contract – one was an FM event, the other one not. This meant (on the wording of that FM clause) that the defendant could not rely on the FM clause.

Frustration

Frustration, in contrast to FM, occurs by operation of law and without the need for a contractual provision. Per the House of Lords in Davis Contractors Ltd v Fareham UDC [1956] AC 696 (at 729):

“frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.”

Sums paid under frustrated contracts are prima facie returnable to the payors under the Law Reform (Frustrated Contracts) Act 1943, with provision being made for the retention of sums incurred as expenses prior to the frustration of the contract.

Underpinning the exercise of the doctrine is the judicial view that courts should be reluctant to interject in commercial agreements. This is reflected by the fact that the doctrine of frustration will not apply if:

1. Performance of the contract has become more difficult or more expensive.
   
   This is not sufficient. Further performance must be impossible, illegal or (per Davis above) ‘radically different’ from what was contracted for.
   
   In Fibrosa v Fairbairn [1943] AC 32, the House of Lords held that the contract was frustrated once World War Two broke out, as performance of the contract (which involved export to German-occupied Poland) then became illegal. This followed the same principles as the High Court had applied in a charter context in Re Badische Co Ltd [1921] 2 Ch. 331, which became illegal as ‘intercourse with the enemy’.
   
   
2. The factual scenario is already dealt with in the contract.
   
   Per the Court of Appeal in The “EUGENIA” [1963] 2 LLR 381:

“To see if the doctrine applies, you have first to construe the contract and see whether the parties have themselves provided for the situation that has arisen. If they have provided for it, the contract must govern. There is no frustration. If they have not provided for it, then you have to compare the new situation with the situation for which they did provide. Then you must see how different it is. The fact that it has become more onerous or more expensive for one party than he thought is not sufficient to bring about a frustration. It must be more than merely more onerous or more expensive. It must be positively unjust to hold the parties bound.”

It follows that where a particular factual event is covered by an FM clause (or similar), it is unlikely to amount to frustration.

Wrongful declarations

The primary risk of wrongfully declaring a contract terminated due to a force majeure event or frustration is that this will amount to an anticipatory repudiatory breach. This requires a party to evince an intention to no longer be bound by the terms of the contract in terms which a reasonable person in the position of the other party would consider to be “clear and absolute” in all the circumstances (per The “PRO VICTOR” [2010] 1 LLR 158).

The position under Norwegian law

The clear starting point under Norwegian law is also that contracts shall be performed in accordance with their terms.

However, when unexpected and extraordinary events like a war occur after a contract has been entered into, a party may be entitled to rely on several Norwegian legal doctrines in declaring termination, suspension or some other modification of the contract.

Force majeure

If there is an FM clause in a contract governed by ­Norwegian law, the position will be very similar to the position under English law. The first order of ­business will therefore always be to consult the text of the agreement.

However, under Norwegian law there is also a general doctrine of FM which may apply by operation of law. Under this doctrine, the debtor may be released from liability and excused from performing the contract if performance is prevented or delayed by an FM event. A traditional FM event is one that satisfies the three main requirements often found in FM clauses, namely:

1. an event outside the control of the parties which they could not reasonably have foreseen,
2. as a result of which performance was prevented or delayed, and
3. that the party relying on the FM clause has taken all reasonable steps to overcome the hindrances.

The sudden and unexpected outbreak of war is the classic example.

What constitutes an FM event will vary depending on the type of contract in question.

Sellers facing an exorbitant increase in the price of raw materials may successfully rely on the FM doctrine – in this context often referred to as “economic FM”. However, like under English law, it is not sufficient that performance of the contract has become more difficult or more expensive. It is required that the price increase totally undermines the fundamental premises of the contract.

If the hindrance should reasonably have been foreseen or if contractual reservations should have been made, FM will not protect the debtor. The fact that an increasing number of restrictions and sanctions are implemented on shipping from a country at war may, in the circumstances be something which the seller of goods from that country should have taken into account when contracting.

Generally, the party hindered by an FM event must be required to give the other party notice thereof.

The specific consequences of FM vary based on the type of contract. In construction contracts, the construction period may for instance be extended. In sales contracts, the seller may be relieved from its duty to deliver the goods and to pay damages, but the buyer may nonetheless be entitled to withhold payment, claim a price reduction, or terminate the contract.

The doctrine of contractual assumptions

A separate, but related doctrine under Norwegian law is that of contractual assumptions. The assessment under this doctrine will however often overlap with the force majeure doctrine.

A contract may wholly or partly be set aside if a ­fundamental assumption on which the contract was based is no longer present. The relevant promise to perform must have been provided under a certain assumption, this assumption must have been causal (motivating) for the promisor (in other words, an important assumption), and the assumption must be considered legally relevant.

If the conditions are fulfilled, the relevant obligation would be set aside or modified. In some cases, the doctrine has even provided a basis for increasing the contractual remuneration.

The doctrine may for example be relied on to excuse performance if, unexpectedly, it becomes significantly more dangerous to perform the contract – like ­sailing in waters where unrestricted submarine warfare ­is suddenly declared. Similarly, the Norwegian Maritime Code contains provisions that may excuse performance of ­charterparties due to war risks. Significant risks of ­economic retribution from third parties, that would have sweeping consequences for a seller’s business – like being “blacklisted” by the British during the First World War – may also excuse performance.

Revision under the Norwegian Contracts Act ­section 36

A third possible legal basis is the Norwegian Contracts Act section 36, which provides that contractual terms that are considered “unreasonable” may be set aside or amended based on a broad consideration of all relevant circumstances.

It is important to stress, however, that the threshold for applying this provision is extraordinarily high in commercial contracts.

Situations where a contractual party has been exposed to a supervening and unexpected event which has caused the performance to be extraordinarily more onerous, may however in the circumstances entitle that party to rely on the Contracts Act section 36.

When assessing the criteria of “unreasonability” in light of the totality of the circumstances of each particular case, many of the same elements we have mentioned in connection with FM and contractual assumptions will be relevant.

In connection with long term contracts where there is an element of cooperation and cost-sharing, the courts may be more willing to adjust terms than in other types of contracts.

The same event may under Norwegian Law potentially trigger all of the three legal doctrines and there is no sharp distinction between them. They may all give grounds for contractual obligations being set aside or modified, but the Contracts Act section 36 provides a more flexible tool for potentially redrafting some of the contractual obligations.

Notwithstanding the above, the starting point under Norwegian law remains that contracts are binding and that contract revision under the three legal doctrines is only relevant in extraordinary situations.

Similar to the position under English law, a wrongful declaration that one is excused from performing the contract, may give rise to claims for breach of contract.

Regardless of whether a contract is subject to English or Norwegian law, these matters warrant very careful consideration of the circumstances in the particular case.