So, what’s the difference?
When it comes to getting out of contracts, in general terms, the law does not allow a party to simply “get themselves out of a bad bargain”, and unanticipated events do not generally allow a party to get out of a contract, or avoid contractual obligations.
It effectively will boil down to the contents of the contract, and the nature of the obligations entered into between contracting parties.
Two common ways to get out of a contract are through frustration and force majeure events. For an overview of both options, see below . . .
A contract is frustrated (and terminated automatically) when an event occurs that makes the contract simply impossible to perform, or the obligations become fundamentally or radically different to those originally undertaken.
A contract is not easily frustrated though, and doesn’t provide any protection for those contracts that were always going to be nigh on impossible to perform.
The crucial factor in trying to establish whether frustration applies to a contract is to identify the parties’ contractual obligations at the date of the contract, and how the particular event in question alters them.
Delayed performance, as opposed to events that materially alter contractual obligations generally do not amount to the frustration of a contract. If the delay is particularly long, or has a serious effect on contractual obligations (such as missing an event), the impact on the obligations might be sufficient to amount to frustration.
A contract’s force majeure provisions may offer an exit route, particularly in circumstances where it is too difficult to establish a frustration. Force majeure is a contractual term, and what qualifies as a force majeure event depends on the contract. For that reason, a force majeure clause often has some examples of events that fall within its scope and a catch all provision such as “any event beyond the control of the parties”.
Examples of common events usually listed in contracts as force majeure events include:
- Act of God.
- Civil commotion.
- Volcanic activity.
- Change in legislation.
These events are not unheard of and, in recent times, such provisions have offered the parties useful protection.
The party relying on the force majeure clause must generally show that
- The event occurred.
- It was outside its control.
- It prevented or delayed its performance.
- It did its best to mitigate its effects.
It is not easy for a party to seek to avoid obligations that it has freely undertaken. Generally, once you’ve made your bed, you must lie in it. That said, in certain circumstances frustration or, more likely, force majeure may apply, but this will always depend upon the specific obligations undertaken.
Finally, don’t forget that a contract may also contain a termination at will provision. Although this may appear to give an unfettered discretion to terminate, care should still be taken if the right is exercised.