Your grain has been destroyed by a missile attack on the terminal. Is the contract still valid?
The wartime present, in which Ukrainian farmers and traders have to work, brings new challenges. Sometimes these challenges are not obvious, and sometimes, unfortunately, they are quite obvious and expected. Such challenges, in particular, are the attacks by the russian federation with missiles and/or drones on harbor infrastructure and port facilities, which destroyed the Ukrainian grain that was there at the time of the attack. As a result, the seller and buyer of such grain are faced with an uncertain situation: is this force majeure? Which party bears the risk of the consequences of such a situation? Is this a basis for contractual liability? How does this situation affect other parties involved in the supply chain?
It is worth noting that in this article we consider mainly foreign economic contracts in the field of grain trade, to which the parties traditionally incorporate the provisions of GAFTA standard proforma contracts, and therefore such contracts are traditionally governed by the law of England and Wales.
What is frustration under English law?
Frustration is an English legal doctrine according to which a contract is considered terminated as a result of events beyond the control of either party. However, such events can occur only after the contract has been concluded. Examples of events that lead to frustration include: (a) destruction of the subject matter of the contract; (b) occurrence of a certain event that causes excessive, extremely serious delay in the performance of an already concluded contract; (c) so-called “subsequent illegality”, i.e. a situation where, after the conclusion of the contract, a legislative act was adopted that declares the fundamental basis for the conclusion of the contract illegal (for example, the sale and purchase of a certain type of goods is officially recognized as illegal), etc. In each particular case the threshold for proving frustration is extremely high, so we provide examples of circumstances that may indicate contract frustration for illustrative purposes only.
Neither GAFTA standard proforma contracts nor specific contracts for the supply of goods between the parties generally contain a frustration clause. However, since frustration is a general English doctrine, it exists regardless of whether it is provided for in the contract or not. Therefore, for frustration to apply, it will be sufficient for the parties to agree that English law is applicable to the contract.
The defining feature of frustration is that frustration terminates the contract once and for all, as opposed to force majeure. Therefore, frustration cannot be temporary – one cannot consider a contract “temporarily terminated” due to frustration and then “bring it back to life”. Accordingly, a contract is either completely terminated due to frustration and the parties are released from future obligations under it, or such a contract is not terminated at all.
Adjustment of the rights and obligations of the parties to a contract terminated due to frustration is established at the legislative level. For example, the Law Reform (Frustrated Contracts) Act 1943 provides, i.a., that a prepayment made before the contract was terminated due to frustration and the parties were released from further obligations under it shall, as a general rule, be recoverable by the party who made the prepayment. Or, for example, if one of the parties to a contract obtained some kind of valuable benefit (other than a payment of money) prior to the contract’s frustration and termination, such party may, taking into account all the circumstances of the case, be obliged to reimburse the other party for a certain sum not exceeding the value of the said valuable benefit.
All of the above indicates that the doctrine of frustration is a complex one. It does not provide for generalized and clear rules for all, but requires a separate individual approach in each situation.
Analogues of frustration in Ukrainian law
Current Ukrainian law does not operate with the doctrine of frustration, but has a construction related to it. For instance, Article 607 of the Civil Code of Ukraine provides that an obligation is terminated by the impossibility of its fulfillment due to a circumstance for which neither party is responsible. In the legal theory, this rule is specified by distinguishing between the actual impossibility of fulfilling an obligation (e.g., destruction of the object of legal relations) and the legal impossibility of fulfilling an obligation (e.g., a legal prohibition to enter into certain types of contracts). It is also important that neither party is to blame for the occurrence of such a circumstance.
Frustration and force majeure
In order to apply the doctrine of frustration, first of all, it is necessary to exclude the possibility of applying a contractual clause of force majeure. How can this be done? As a general rule, if the parties directly or indirectly determined in the contract itself that certain events should be qualified precisely as circumstances of force majeure, then the force majeure clause is to be applied and in accordance with the rules established by the contract itself. If the parties to the contract did not initially define a certain event as force majeure, or their contract does not contain a force majeure clause at all, then there is a certain space for the doctrine of frustration to be applied.
However, practice brings up different options and interesting situations. One of these interesting situations in terms of choosing a qualification between frustration and force majeure is the situation of destruction of grain as a result of a missile or drone attack.
So, can the destruction of grain as a result of a missile or drone attack be considered a force majeure? In short, it all depends on the actual circumstances and the ability to “save” the contract. For example, acts of war may be considered force majeure, provided that the parties have directly or indirectly stipulated in the contract that acts of war should be qualified as force majeure, and there is still a chance that the obligations of the party on whose side such circumstances arose will be fulfilled, albeit with a delay.
In particular, the parties to foreign economic contracts in the field of grain trading traditionally incorporate into their contracts the provisions of GAFTA standard proforma contracts, which contain force majeure clauses that are to be understood as circumstances that make it impossible to perform the contract, in particular: (a) prohibition of export or other executive or legislative act done by or on behalf of the government of the country of origin or the territory where the port or ports named herein is/are situate, restricting export, whether partially or otherwise; (b) a blockade; (c) acts of terrorism; (d) hostilities; (e) strike, lockout or combination of workmen; (f) riot or civil commotion; (g) breakdown of machinery; (h) fire; (i) Act of God; (j) unforeseeable and unavoidable impediments to transportation or navigation; (k) any other event comprehended in the term “force majeure”.
Thus, the GAFTA standard proforma contracts define “hostilities” as a type of circumstances that make the performance of the contract impossible (i.e., define them as a force majeure event). It is also worth noting that the proposed list of force majeure circumstances is open-ended, and therefore any other event covered by the term “force majeure” may qualify as such.
From the above position, the destruction of grain as a result of hostilities (acts of war) may be considered a force majeure event. It is worth remembering that GAFTA standard proforma contracts provide for certain rules of interaction between the parties to the contract, only subject to which the term for performance of the contractual obligation will first be suspended for the duration of the force majeure, and only later, provided that the force majeure continues, the contract will be considered automatically canceled.
At the same time, another possibility should be taken into account, namely the qualification of the destruction of grain through the elements of the doctrine of frustration contained in Section 7 of the Sale of Goods Act 1979, which provides for the following:
“7. Goods perishing before sale but after agreement to sell.
Where there is an agreement to sell specific goods and subsequently the goods, without any fault on the part of the seller or buyer, perish before the risk passes to the buyer, the agreement is avoided.”
In turn, Section 61(1) of the Sale of Goods Act 1979 defines “specific goods” as “goods identified and agreed on at the time a contract of sale is made and includes an undivided share, specified as a fraction or percentage, of goods identified and agreed on as aforesaid”.
In the old English case of Howell v Coupland from 1876, the respondent (the farmer) agreed to sell 200 tons of potatoes to the claimant (the buyer), which were yet to be grown on a specific field. However, the crop was harmed by a disease and only 80 tons of the 200 tons were harvested. Thus, the respondent (the farmer) was only able to deliver about 80 tons of the goods. The claimant (the buyer) accepted 80 tons of the goods and filed a claim against the farmer for failure to deliver the goods in full quantity. The respondent (the farmer) argued that his non-performance should be excused under the common law rules of frustration, which require that the sale contract was for specific goods. The English courts agreed with the respondent’s (the farmer’s) position and noted that there was an agreement on the future sale of a specific goods, but due to an unexpected crop disease that resulted in a reduced amount of such goods, the respondent (the farmer) was released from liability under the contract.
Thus, in order to apply the doctrine of frustration, which is provided for by law (i.e., the Sale of Goods Act 1979), several conditions must be met: (a) there must be a sale of a specific goods; (b) the product must have perished without the fault of any party to the contract; and (c) the risk has not yet passed from the seller to the buyer.
What cases may fall under the cases of frustration of contract?
Let us consider several scenarios in which we can potentially talk about frustration of a contract. At the same time, please note that frustration can only be invoked if the relevant circumstance of frustration is not absorbed by a contractual clause of force majeure. Nor can frustration occur if the contract could not be performed from the very beginning.
Scenario 1 – Destruction of grain stored in a terminal at port as a result of a missile attack
The destruction of grain stored in a terminal at port as a result of a missile attack could potentially qualify as frustration of the sale contract (with the subsequent automatic release of both parties from their obligations), but only if the seller can prove that the grain is “specific goods” and that it was the one, which was supposed to be delivered to the buyer, but was destroyed by a missile attack. At the same time, the seller must not have an alternative option to perform the contract – i.e., if the seller also has a certain amount of grain at a neighboring terminal, the contract can hardly be recognized as “frustrated”. The same applies to the situation where, despite the destruction of the “primary” grain, the seller had enough time to, for example, transport additional “lots” of its grain to the port.
Scenario 2 – Supply of grain to the occupied territory
The enemy’s occupation of the territory where the contract-designated place of delivery is located may be recognized as a circumstance that terminates the contract due to its frustration. For example, the delivery of goods in 2022 to the russian-occupied ports of Mariupol or Berdiansk. At the same time, a similar contract, but concluded after the occupation of the relevant territory and with the delivery of goods, for example, in 2023, could no longer be qualified as “frustrated”. This is due to the fact that from the very moment such a contract was concluded, it should have been clear to the parties that it was impossible to perform.
Scenario 3 – Long-term delay in the arrival of vessels at Ukrainian ports of destination due to restrictions or danger as a result of hostilities (acts of war)
Unless otherwise specified in the contract, a situation with a long delay in the arrival of vessels to Ukrainian ports of destination due to restrictions imposed or due to the declared danger as a result of hostilities (acts of war) may be considered a circumstance of frustration. For example, under an FOB delivery contract, the buyer must nominate a vessel that must be able to arrive at the destination port for loading within the specified delivery period, and if the buyer fails to do so, the seller may terminate the contract. In order to qualify as frustration a situation where the buyer of goods on an FOB basis has made a nomination, but such a vessel cannot arrive at a Ukrainian port due to restrictions or danger as a result of hostilities (acts of war), a number of questions must be answered. For example, is the port closed to all vessels and, if not, can the buyer replace the nominated vessel with another one? Is the vessel’s delay so long that it radically changes the nature of the contract itself? Can reasonable measures be objectively taken to “save” the contract, such as changing the terms of delivery, delivery period, mode of transport, etc.? Can it be established that the inability of the vessel to arrive at the port makes the contract impossible to perform? Thus, in order to successfully qualify for frustration, it is necessary to pass a certain “test”, which, in turn, depends on the specific factual circumstances of the case.
And in conclusion…
For a domestic market player, the English doctrine of frustration is not familiar to understand and easy to apply, even though Ukrainian law provides for a certain analogue of this doctrine. Therefore, in order to apply it successfully, it is important to analyze both the factual circumstances and the legal nature of contractual obligations in each individual case. The complexity of the doctrine of frustration lies in the fact that its successful qualification depends on obtaining answers to numerous questions, and in case of a potential conflict with the counterparty, it is necessary to deal with them as early as possible. After all, it is much easier and safer to manage a potential dispute rather than to subsequently manage an existing dispute, including in arbitration.
Yuliya Atamanova, Partner at LCF Law Group, and Polina Bitiuk, Associate at LCF Law Group, for “The Latifundist“
