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Frustration, Force Majeure and Material Adverse Change

Andrew Spink QC and Saaman Pourghadiri summarise how contractual obligations may be affected by the Covid-19 pandemic and measures taken to quell it.

Governments across the world have taken unprecedented steps to restrict ordinary daily life in an effort to mitigate the severe impact of Covid-19. The human impact of Covid-19 is enormous but the pandemic will also have profound short and long-term economic effects.

In response to various enquiries over the last few days, Andrew and Saaman have constructed a guidance note looking at some key elements in construing Force Majeure (FM) clauses and the common law doctrine of frustration before considering Material Adverse Change (MAC) clauses.

Whether Covid-19 and the global response to it fall within FM or MAC clauses or trigger the application of the doctrine of frustration will involve a close analysis of the facts to determine the precise impact of the pandemic on the business or performance of the contract in question coupled with a careful interpretation of the relevant terms of that contract.

Force Majeure

Force Majeure (“FM”) clauses can excuse parties from contractual performance.  The scope and effect of a FM clause is a matter of construction. FM clauses will usually specify the series of events which they cover. Typically:

  • performance must be rendered impossible by the event
  • the event must have been beyond the control of the defaulting party
  • the defaulting party must have taken all reasonable steps to avoid the event
  • the event must be the only effective cause of default.

Section 3 of the Guidance Note looks at FM clauses more closely.

Frustration

Frustration is a common law doctrine. If an unforeseeable event occurs after a contract is formed, which radically changes the nature of the contract, then the contract may be frustrated. The effect of frustration is to discharge the parties from future performance, but the contract is not made void ab initio.  Pursuant to the Law Reform (Frustrated Contracts) Act 1943, the court has the power to make adjustments to each party’s position to reflect monies paid, expenses incurred and benefits received prior to the discharge of the contract.

Section 4 of the Guidance Note looks at the test for frustration, limits of frustration and remedial measures more closely.

Material Adverse Change

Material Adverse Change (“MAC”) clauses are typically found in M&A and finance documents. Typically, they permit a purchaser not to complete an acquisition in the event of a material adverse change, or they permit a lender to decline to advance any further lending or call an event of default. MAC clauses are infinitely varied and the circumstances in which they will be triggered are a matter of construction and careful evaluation of the change in question.

Section 5 of the Guidance Note looks at Material Adverse Change clauses and relevant case law.

Find Out More

FM Clauses, MAC clauses and the doctrine of frustration can provide an escape from contractual obligations in extreme situations such as the current pandemic. However, none necessarily offer a panacea, and in all cases there must be an acute focus on the precise way in which the present circumstances are affecting the business or contract in question coupled with a careful interpretation of the relevant contractual clauses.

Contact Andrew Spink QC or Saaman Pourghadiri of our Commercial Dispute Resolution Team, who would be pleased to discuss your specific circumstances in the strictest of confidence.

Read the full guidance note here: Outer Temple Chambers Force Majeure Guidance Note

Please contact David Smith on +44 (0)20 7427 4905 or Colin Bunyan on +44 (0)20 7427 4866 for further information and details of future events on this area of law.

Covid-19, Commercial during Covid-19, Commercial, News 30 Mar, 2020

Authors

Andrew Spink QC

Call: 1985 Silk: 2003

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