Force majeure and contractual discretion

In one of the first decisions relating to a force majeure provision arising from the Covid-19 pandemic (Dwyer (UK) Franchising Ltd v Fredbar Ltd & Bartlett) the High Court has looked at a contract where the declaration of force majeure was at one party's discretion.  It held that a franchisor was in repudiatory breach by failing to comply with an implied term to exercise that discretion in line with the principles identified in Braganza.

The Covid-19 pandemic and force majeure

Dwyer (UK Franchising) Limited ("Dwyer") is the franchisor of the "Drain Doctor" plumbing and drain repair services franchise, and entered into a franchise agreement with Fredbar Limited ("Fredbar") as franchisee, and Mr Shaun Bartlett as guarantor.

Dwyer claimed that Fredbar committed a repudiatory breach when it purported to terminate the agreement and so Dwyer was entitled to terminate the agreement and seek damages for breach. It also sought injunctive relief.

Fredbar argued that it was entitled to terminate the agreement on a number of grounds, one of which being that Dwyer had failed to comply with the force majeure provision during the Covid-19 pandemic. The force majeure clause provided:

"This Agreement will be suspended during any period that either of the parties is prevented or hindered from complying with their respective obligations under any part of this Agreement by any cause which the Franchisor designates as force majeure including strikes, disruption to the supply chain, political unrest, financial distress, terrorism, fuel shortages, war, civil disorder, and natural disasters."

Fredbar first requested a suspension of the agreement related solely to the effect the Covid-19 pandemic was having upon turnover. Dwyer refused to designate that as a force majeure event.

Mr Bartlett later emailed Dwyer a copy of a notification from the Chief Medical Officer for Wales stating that Mr Bartlett's son was vulnerable and that the best way of avoiding Covid-19 was to stay at home for the next 12 weeks. Dwyer continued to refuse to designate a force majeure event, referring in correspondence to the general impact of Covid-19 on Fredbar's business and not Mr Bartlett's family position.  

Contractual discretion and the Braganza duty

The Judge applied the principles identified in Braganza and held that there was an implied term that the power to designate a force majeure event must not be exercised arbitrarily, capriciously, perversely or irrationally. In exercising its power under the contract, Dwyer needed to take account of all matters which were relevant and none which were irrelevant. In ignoring the critical factor of the need for Mr Bartlett's family to isolate, which directly affected Fredbar's ability to supply services, Dwyer had failed to exercise its discretion in accordance with the implied term.

The Judge held that the breach of the implied term was a repudiatory breach, either because the implied term was an important term which went to the root of the commercial purpose of the agreement (ie a condition) or, alternatively, if it was an intermediate term, the breach was so serious as to be repudiatory. However, the Judge went on to find that in accepting Dwyer's offer to suspend the agreement on agreed terms unrelated to the force majeure provision, Fredbar had affirmed the agreement.

What does this mean for you?

The judgment is interesting on many fronts, in particular, (i) it is one of the first decisions relating to a force majeure provision arising from the Covid-19 pandemic, having been brought on an expedited basis, and (ii) the application of the so-called Braganza duty to a force majeure clause is novel.

That said, the terms of the force majeure clause itself are unusual in giving one party the discretion to designate events as a force majeure event, rather than defining them within the terms of the contract.

The Judge referred to the fact that ""Force majeure" as a legal term means unforeseeable circumstance(s) that prevent someone from fulfilling a contract." This could be read as contrary to the accepted position that force majeure has no specific meaning in English law and is defined only by the terms of the contract. However, it may be that the Judge was simply trying to summarise the way in which force majeure is generally applied in contracts, given the limited definition in the franchise agreement itself.

The Judge was critical of Dwyer's "unattractive approach" to its dealings with Fredbar and Mr Bartlett generally and while not referring specifically to the Government Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the COVID-19 emergency noted that Dwyer's approach "represented a failure to treat a franchisee compassionately in the context of exceptional circumstances which required all companies to adopt a reasonable approach rather than apply strict legal rights. It was contrary to the whole tenor of approach expected at the time". This may indicate that courts will be more sympathetic to those affected by the Covid-19 pandemic than they may otherwise have been when interpreting and applying force majeure and similar provisions, particularly in cases of unequal bargaining power.