Mona Patel Partner
COVID-19: Are you(r contracts) frustrated?
Following on from Ince’s recent article on force majeureclauses, we consider the common law rules on frustration.
Frustration may provide relief for parties under English law governed contracts entered into before the onset of COVID-19 which are now difficult or impossible to perform and where there is no force majeure clause in the contract or a force majeure clause does not sufficiently capture an event such as COVID-19.
What is frustration?
Under English law, the common law doctrine of frustration may operate to terminate a contract where:
- an event occurs after a contract has been entered into
- neither party is at fault
- the event makes performance illegal, impossible or transforms the relevant obligation into a radically different obligation from that agreed when the contract was entered into
- the event is not covered by the contract
What is the effect of frustration?
Unlike force majeure (where a contract is merely suspended), the eﬀect of frustration is the automatic termination of the contract (i.e. without the election of either party), which means both parties are discharged from their future obligations. There is also no need to notify the other party, though it is best practice to do so. This makes frustration a rather blunt instrument.
As regards losses, depending on the terms of the contract, parties can, under The Law Reform (Frustrated Contracts) Act 1943, usually recover amounts paid or expenses incurred in performing contractual obligations under the contract before it was frustrated (less the other party’s expenses).
What are examples of “frustrating events”?
The types of events the courts have previously considered fell within the scope of the doctrine of frustration include:
- Method of performance impossible e.g. a contract where goods were to delivered by ship on a certain date to a certain port, which is now closed. However, the courts have held that a contract will not be frustrated where performance is possible by a diﬀerent method, and the diﬀerence between the two methods of performance is not suﬃciently fundamental
- Temporary unavailability e.g. where regular shipments of goods over a long-term contract were to be delivered under a contract but such goods have been temporarily diverted for another use
- Failure of a speciﬁc source: e.g. the importation of goods from a country which is now subject to an export ban
- Illegality: if the contract becomes illegal as a result of changes in law. e.g. emergency legislation may be introduced to deal with the pandemic
Whether frustration will apply or not will depend on the facts of the case. In the present circumstances, it will particularly depend on whether a global pandemic was considered when the parties entered into the contract (perhaps unlikely for contracts entered into before 2020). It is important to keep in mind that the courts have generally tended to apply the doctrine of frustration quite narrowly. For example it is unlikely to apply to allow a contracting party to escape from what has turned out to be a bad bargain. Also, the party seeking to rely on frustration must also be able to show that it took reasonable steps to mitigate the impact of the frustrating event on its performance of the contract.
Frustration or force majeure?
The first step is to consider other contractual remedies, including whether there is a force majeure clause in the contract. Where a contract contains a force majeure clause and it deals with the issues at hand specifically (e.g. how costs and losses might be apportioned between the parties) frustration will not apply. This is because the parties have already considered the issue and provided for it in the contract.
Where there is no force majeure clause or there are gaps in it (e.g. there is room for debate on whether it covers COVID-19), there may be scope to argue that a contract has been frustrated. However, parties should keep in mind that frustration is a somewhat “nuclear” option, which may not be appropriate in the circumstances e.g. where a contract contains long-term rights and obligations that are unlikely to be rendered impossible by the expected short-term effects of COVID-19. Also parties must remember that the wrongful assertion of frustration may amount to an anticipatory or repudiatory breach of the contract.
It may therefore be more prudent to actively negotiate with the other party for possible waivers, time extensions and mutually beneficial alternatives to fulfil contractual obligations.
The above does not constitute legal advice nor does it consider a complete list of issues to consider in the context of COVID-19. Should you have any queries, please do not hesitate to contact the authors of this article or your usual contact at Ince.