The document provides a summary of a presentation on frustration, force majeure, and sanctions clauses. It discusses how these legal concepts can provide relief for unexpected events that make contract performance difficult or impossible. It also provides tips on drafting contracts to allocate risks and define what events would trigger these clauses.

1. Frustration, Force Majeure and Sanctions:
A practical guide for in-house counsel
Richard Little
David Savage
Conor Redmond
Eversheds LLP
26th
March 2015

2. Frustration, Force Majeure and
Sanctions
Today’s speakers
David Savage
Senior Associate
Financial Services Disputes
and Investigations
Richard Little
Partner
Commercial Dispute
Resolution
Conor Redmond
Associate
Commercial Dispute
Resolution

3. • Introduction
• Frustration
• Force Majeure
• Excusable delay
• Illegality
• Sanctions
Agenda

4. Poll on key risk factors
Which of these risks do you most frequently
manage for your business?
•Political unrest and/or armed conflict
•Changes to a relevant legal system
•Commodity price or currency fluctuations
•Natural disasters
•Supply chain issues
•Imposition of economic sanctions

5. Introduction
What could possibly go wrong?
• Man-made and natural events may make
contracts difficult, more expensive or
impossible to perform
• Think: Arab Spring, 9/11, Eyjafjallajökull*,
Tsunami 2011, ISIS, sanctions, coups,
Argentinian oil industry nationalisation, etc.
• How does the law relate to unexpected,
sometimes catastrophic, events?
• How can a contract deal with such events?

6. Introduction
Libya: pariah, friend, enemy, failed state
1982 – US sanctions imposed, targeting oil imports
1992 – UN air/arms/ oil equipment embargo
1996 – Iran-Libya Sanctions Act passed in US
1999 – UN sanctions suspended
2003 – UN sanctions ended
2004 – Many US sanctions lifted
2011 – Military intervention and fall of Qaddafi
2012 – NTC hands power to newly elected GNC
2014 – Central government collapses

7. Introduction
Libya – Crude Oil production over last 10 years

8. Frustration

9. Frustration
• General rule - if performance of a contract
becomes difficult or even impossible, the party
who fails to perform it is liable in damages
• The doctrine of frustration can provide an
exception to this general rule
• The doctrine provides that a contract is
automatically discharged if a frustrating event
occurs
• The doctrine is very narrow and of limited/
uncertain application
Role at common law

10. Frustration
What is a frustrating event?
• A frustrating event is one which:
– occurs after the contract is formed;
– strikes at the very root of the contract;
– is not due to the fault of either party;
– was entirely beyond the parties’ contemplation
when they entered into the contract; and
– renders further performance impossible or
illegal or makes it radically different from what
was contemplated when entering into the
contract.

11. Frustration
Examples of frustrating events
• Destruction of the subject matter of a contract
(Taylor v Caldwell)
• Unavailability of the subject matter (Re Shipton,
Anderson & Co)
• Supervening illegality of performance, e.g. a
subsequent change in the law or circumstances
(Denny Mott v James B Fraser)
• Cancellation of an expected event (Krell v Henry)

12. Frustration
Where frustration has not been available
• Express provision in the contract
• An alternative method of performance is possible
(Tsakiroglou v Noblee and Thorl)
• The contract is merely more expensive to
perform (Tsakiroglou v Noblee and Thorl)
• The seller is let down by its own supplier
• Changes in economic conditions
• It is self-induced

13. • Contract automatically discharged and the
parties are excused from their future obligations
• No one party is at fault so neither party may
claim damages for the other's non-performance
• “Loss lies where it falls" so no claim can be made
for the value of a partially completed contract
(Appleby v Myers) unless there has been a total
failure of consideration (Fibrosa v Fairbairn)
• If a party incurred obligations before the time of
frustration, it remains bound to perform them
Frustration
Consequences under common law

14. Frustration
Consequences under the Law Reform (Frustrated
Contracts) Act 1943
• The 1943 Act applies to most commercial contracts
• Monies paid before the frustrating event can be
recovered
• Monies due before the frustrating event, but not in
fact paid, cease to be payable
• Expenses can be recovered with the courts
permission
• Those who gain a valuable benefit prior to frustration
may be required to pay a “just” sum for it
• If the contract is one to which the 1943 Act does not
apply, the parties must rely on the common law rules

15. Frustration
Tips for managing risk
• Plan ahead - do not rely on the doctrine of
frustration!
• Identify, assess and allocate the risks associated
with any contract
• Consider including a clause to deal with a default
caused by certain events outside of the parties’
control
• For example, a force majeure clause

16. Force Majeure

17. Force Majeure
Introduction
• A potential method of dealing with a volatile
world and addressing the shortcomings of
frustration doctrine
• General principle: a party should be relieved
from liability for a failure to perform, or delay in
performing, caused by unexpected events or
circumstances outside its control
• Examples include Acts of God, war, terrorism,
relevant changes in law and extreme weather
conditions
• Difference of approach between common/civil
law

18. Force Majeure
Role at civil law: Italy
• Definition of Force Majeure under Italian
legislation aims to protect a party from liability
where a contract is not performed due to the
occurrence of an event that was neither within
that party’s control nor attributable to that party
• Advisable in Italy to include general wording at
end of Force Majeure clause such as “and any
other Force Majeure causes beyond the control
of the parties”.
• Courts will then decide case by case if an event
can be interpreted as a force majeure event

19. • Under French law a Force Majeure event is an
event (and set of consequences) which could not
be predicted and avoided even if all normal and
appropriate measures had been taken
• The exemption is only effective for so long as the
force majeure event lasts, unless the parties
decide to terminate the contract
• Any party may claim exemption under Force
Majeure, even if there is no Force Majeure clause
• Advisable to include Force Majeure clause
regardless
Force Majeure
Role at civil law: France

20. Force majeure
• No concept of Force Majeure at common law
• Force Majeure has evolved by contract to fill the
gap left by the uncertainties of frustration
• The term “Force Majeure” derives from French
law and has no established meaning under
English law.
• It must, therefore, always be defined in
common law contracts.
Role at common law

21. Force Majeure clauses
The rationale
• Form part of the allocation of risk under a
contract
• Should be considered and negotiated in this
context alongside other risk allocation provisions
• Remember: if one party is relieved from liability
for a failure due to something beyond its control,
result is that the other party bears the
consequences of that failure
• Issue of risk allocation: Who is in the best
position to manage the risk?
• Fact dependent

22. Force Majeure
How to define
• Can be defined as something which is beyond
the reasonable control of the affected party
• A wide concept which can lead the court to
impose an obligation to take reasonable
preventative measures
• A more tailored approach preferable-consider the
contractual context

23. Force Majeure
Customer v Supplier-definition priorities
• Customers should:
– limit the definition to a list of specified events;
anything not on the list will not constitute FM
and will not afford relief from liability
– provides additional certainty
• A supplier should:
– consider whether it is aware of anything which
could prevent it from fulfilling the contract
– define these things expressly as FM events
– consider whether to make reference to specific
events relevant to the supplier’s industry

24. Burden of proof
• A party relying upon a Force Majeure clause must
prove that
– one of the events referred to in the clause has
occurred and the clause has been triggered;
– he has been prevented, hindered or delayed from
performing the contract by reason of that event;
– non-performance was due to circumstances
beyond his control; and
– no reasonable steps could have been taken to
avoid or mitigate the event or its consequences
Key elements

25. Force Majeure
Planning ahead
• Consider the role of business continuity or disaster
recovery plans
• Put contractual obligation on supplier to prepare
and implement a contingency plan
• A failure to devise or implement such a plan
should not absolve the supplier from liability under
the FM clause
• If a supplier prepares and implements a plan
which complies with its contractual obligations but
an unforeseen disaster occurs, it may be
reasonable for this disaster to come within the
scope of a FM event

26. Force Majeure
When an event occurs
• Affected party should only be relieved from
liability to perform if there is a causal connection
between the occurrence of the force majeure
event and the inability to perform
• Affected party should be required to give notice
to the other party if a Force Majeure event
occurs
• Consider the extent to which the affected party
must mitigate the effects of the force majeure
event and try to perform in alternative ways.

27. Force Majeure
Termination
• Key to avoid situation where performance of
contract is suspended indefinitely by occurrence
of FM event
• Include right to terminate where FM event
continues for longer than a specified period
• Consider if:
– termination should be triggered simply by FM
event continuing beyond the specified time or
only if the event has a sufficiently significant
impact on performance of the contract
– only non-affected party has the right to
terminate or if the affected party should too

28. Force Majeure
Consequences of termination
• When a contract terminates due to the
occurrence of FM event, options include:
– for the contract to terminate without liability
(bar antecedent breaches);
– monies paid for goods/services that are not
supplied are reimbursed;
– materials provided are paid for; and
– part deliveries are returned.

29. • A contractual remedy for unexpected events
• Not all such events can be catered for- the
“unknown unknowns”
• Further contractual protection may be required in
certain circumstances
• Excusable delay, illegality of performance and
sanctions clauses becoming increasingly
important in this regard
Force Majeure clauses
Limitations

30. Excusable Delay

31. Excusable Delay
Excusable Delay
•For contracts where actions have to be performed
within a proscribed period
•Events which are not traditional “force majeure”,
but are outside the control of the parties
•Aim of the clause is to give the parties additional
time to fulfil their obligations
•Of particular importance if the contract contains
LD provisions
•Contain a long stop provision

32. Illegality

33. Illegality
• Defence of illegality excuses a party of its
obligations under a contract
• Courts are caught between enforcing the rights
of parties and upholding law
• Defence only succeeds where depriving
claimant’s rights is a proportionate response
• Some statutes prohibit certain types of
contract, others prescribe criminal or regulatory
penalties
Invalidity of contracts

34. Illegality
• A contract that cannot be performed without an
illegal act will be void
• An innocent party, who did not know the other
would perform the contract in an illegal way, will
be able to enforce the contract
• If both parties are complicit in the illegality,
defence still available if a proportionate response
• Illegality defence may apply where neither party
has pleaded it through the court’s duty to uphold
the law
Consequences

35. Illegality
• A contract entered
into by parties may
subsequently contain
illegal provisions
• It may be possible to
sever the illegal part
of the contract, and
enforce the rest
Severance

36. Illegality
• Example of a severance clause:
“1.1 If any provision or part-provision of this agreement is or becomes invalid,
illegal or unenforceable, it shall be deemed modified to the minimum extent
necessary to make it valid, legal and enforceable. If such modification is not
possible, the relevant provision or part-provision shall be deemed deleted. Any
modification to or deletion of a provision or part-provision under this clause
shall not affect the validity and enforceability of the rest of this agreement.
1.2 If [one party gives notice to the other of the possibility that] any provision
or part-provision of this agreement is invalid, illegal or unenforceable, the
parties shall negotiate in good faith to amend such provision so that, as
amended, it is legal, valid and enforceable, and, to the greatest extent
possible, achieves the intended commercial result of the original provision.”
Severance

37. Sanctions

38. The Sanctions Life Cycle

39. High Risk Jurisdictions

40. • Introduction of sanctions may make
contractual performance illegal or
impossible
• Particular difficulties may arise where
sanctions are imposed in one jurisdiction
with extraterritorial effect, but not enforced
in another jurisdiction
• Go beyond Force Majeure/frustration
clauses
• Wording of clause will vary depending on
nature of contract
Sanctions
Effect on contracts

41. • Are sanctions really Force Majeure?
• Can include in definition of Force
Majeure, e.g.
“an act of God including but not limited to
fire, flood, earthquake, windstorm or
other natural disaster; act of any
sovereign including but not limited to …
imposition of government sanction,
embargo or similar action; or acts of
terrorism.”
Sanctions
Nature of sanctions clauses

42. • express agreement that the activities dealt with
by the contract are not the subject of sanctions
• provides either party with the right to cancel
upon the imposition of sanctions
• such imposition should make performance
under the contract either impossible or illegal
• requires each party to notify the other
immediately upon an activity becoming
sanctionable
• include appropriate warranties and indemnities
for breach
• stipulate, if possible, alternative methods of
performance, payment, etc
Sanctions
What should sanctions clauses contain

44. David Savage
Senior Associate
Financial Services Disputes and
Investigations
Direct dial: 0845 497 0524
E-mail:
davidsavage@eversheds.com
Richard Little
Partner
Commercial Dispute
Resolution
Direct dial: 0845 497 0602
E-mail:
richardlittle@Eversheds.com
Conor Redmond
Associate
Commercial Dispute
Resolution
Direct dial: 0845 497 4710
E-mail:
conorredmond@eversheds.com