Businesses in the Channel Islands are now starting to resume normal operations as much as possible. Even so, there may still be certain limitations, particularly if businesses are reliant on particular supply chains that may still be subject to restrictions or reduced production, or due to key employees or contractors being prevented from travelling. With such ongoing challenging situations impacting on business operations, it is important to understand what the options might be for a party to a contract when they are unable to perform the contract as originally agreed, but where the other party will not agree to accept a different level of performance or no performance at all.
It is worth remembering at the outset that the Jersey and Guernsey laws of contract are not simply based on English common law principles. Each Island has its own law of contract, the dominant influence being Norman French law. Therefore, whilst English law principles will usually be considered, the Royal Courts in each Island will also look to other sources, including older Norman French commentators such as Pothier, as well as modern French law.
The contract might itself provide in its terms for the impact of certain events. This is known as force majeure and arises where there is an express clause in the contract that has the effect of delaying or relieving a party from strict compliance with its contractual obligations where a defined event occurs. Usually these events are beyond the control of the parties, and examples include war, revolution, government intervention and ‘acts of God.'
Under English law, a defence of force majeure can only arise out of an express provision of a contract: its scope and application are entirely determined by the words used in the particular contract. It is therefore a question of contractual interpretation as to what the parties have included as a force majeure event, and whether those conditions have been met by reference to the prevailing circumstances.
There is limited case law in Jersey in relation to the principles that govern the interpretation of a force majeure clause. The starting point under Jersey law is that there is a high degree of sanctity for the agreement reached between the parties. This is due to the maxim la convention fait la loi des parties, which is one of the cornerstones of Jersey contract law. Where parties have freely entered into an agreement, good cause will need to be shown why it should not be enforced. The Royal Court will look to uphold that agreement and its terms, unless those terms are contrary to public policy. It is difficult to see on what basis a force majeure clause dealing with release from performance in a commercial contract would likely be found to be contrary to public policy (although it is possible).
The principle of force majeure appears to have been impliedly accepted by the Royal Court, which confirmed that a party seeking to rely on a force majeure clause “must satisfy us that this was an express or implied term of the oral contract. It is clear from the authorities that a “force majeure” clause is frequently to be found in commercial contracts, that such clauses vary in their terms and that where such a clause is included in a contract it must be construed with due regard to the nature and general terms of the contract and in particular with regard to the precise terms of the clause.”1
This suggests that a force majeure clause included in a contract is likely to be upheld by the Royal Court, although its scope and effect and whether a party can rely on it will be subject to the Court's interpretation of the express terms of the clause considered against the prevailing facts.
In Guernsey the position is thought to be broadly the same as that in Jersey. There is very little case law considering force majeure
provisions; however, the Royal Court has made it clear that it will only interfere with parties' exercise of contractual discretion in extremely limited circumstances. “If the decision is reached on the basis of only relevant factors, after such enquiries have been made, and is therefore a rational, and not an irrational decision, it will be upheld by the Court. It is no part of the Court's function to second-guess the contracting party and to arrive at the Court's own conclusion on the matter; that would be to usurp the function given by agreement to the contracting party”.2
Like Jersey, this again suggests that a force majeure clause would likely be upheld by the Royal Court if its terms are clear and a proper factual basis exists.
Under English law, the doctrine of frustration can apply when a contract has become incapable of being performed and where this is not due to the default of either party. A party raising frustration as a basis for not performing a contract has to show that, due to the circumstances, performance of the obligation is radically different from what was agreed in the contract.
Typically, however, if a contract contains a provision intended to deal with the situation that has arisen, such as a force majeure clause, the application of the doctrine of frustration will be precluded.
There are limited cases in Jersey that have considered the doctrine of frustration3, and the implication is that the English law position is likely to be persuasive. The only case to consider this in any detail was Mobil and the suggestion was that total impossibility was required. Where a contract may be more onerous to comply with for one party (for instance in having to use a substituted product) that would not be sufficient to establish frustration.
In a more recent judgment4, the Royal Court was asked to consider whether the Jersey doctrine of frustration was based on French law. This may prove to be an important distinction in due course
Contract Issues - A Customary Law Look at the Common Law Defences of Force Majeure and Frustration
as it may allow the Royal Court to deal with a partial or temporary impossibility frustrating a contract. The Royal Court did not in that case ultimately need to consider the point and so made no determination on the principles applicable under Jersey law.
The position in Jersey therefore remains somewhat unclear. Taking a cautious approach, in our view someone seeking to rely on frustration would need to demonstrate that the performance of the contract was impossible and not merely more onerous. This is a high threshold to cross and frustration is likely to be a difficult defence to establish.
In Guernsey there is very little case law which considers the doctrine of frustration and thus the position is again somewhat unclear. Our view is that like Jersey, the Royal Court would require to be satisfied that performance was rendered genuinely impossible as a direct result of the events in issue.
Whilst the conditions for business operations might be improving gradually, given the economic challenges that are still to be faced there will inevitably be a need for businesses to consider their contractual obligations and whether those can be performed now or in the immediate future. Businesses may well need to be looking to the terms of their contracts or broader legal principles to relieve them of all or some of those obligations, or be facing counterparties relying on those principles.
Ultimately the devil will be in the detail of the provisions of a contract and how they will be interpreted and applied to the circumstances prevailing at the relevant time. However, given that there is little guidance from the Channel Islands' Courts on the law of frustration, outcomes contractually will likely be as difficult to predict as the course the pandemic and the global economy will take in the coming months. Looking forwards, therefore, a well-drafted force majeure clause should be considered in any future commercial negotiations.
1 Mobil Sales & Supply Corporation v Transoil (Jersey) Limited  JJ 143
2 Woodbourne Trustees Ltd & Generali Worldwide Insurance Company Limited - Guernsey Judgment 3/2011
3 Mobil (ibid); Hotel de France v Chartered Institute of Bankers 
4 Florida Foundation v Jeanne  JRC252
Originally published 24 July, 2020
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