Q&A – Frustration

Question: Can I suspend or cancel a contract concluded before Covid-19 became a pandemic and that I cannot perform in the current climate?

Answer: The legal doctrines available to a party to a contract to suspend or cancel the contract in extreme circumstances like Covid-19 vary from country to country.  The first thing to do if you are bound by a contract and you wonder what your rights are, is to look to see if there is an applicable law clause in the contract (i.e. a clause that expressly states the law of the contract – that clause is typically found at the end of the contract).  If there is such a clause, then you know what law applies and you can take a advice in the jurisdiction in order to establish if you can rely on force majeure.  If there is no applicable law clause, the law applicable to the contract requires a fact-based analysis.  This may be straightforward if the parties are in the same jurisdiction and the contract was concluded in that jurisdiction.  If the parties are based in different countries and the contract was concluded in a third country, the analysis can be complex.

Assuming that English law applies, the general rule is that contractual obligations are binding and absolute even if performance proves impossible. Parties may themselves alter this rule by including various provisions in the contract, particularly a force majeure clause. Where a contract does not include a force majeure clause, the doctrine of frustration can also soften the onerous general rule. Frustration operates in situations where it would be unjust and unreasonable to hold the parties to their contract because of an occurrence of an unforeseen event. However, frustration ought not to be invoked lightly, as the doctrine operates within very narrow limits and the courts are typically reluctant to find that a contract has been frustrated.

Frustration only emerged as a contractual doctrine in the late nineteenth century. They does not seem to be an English case yet considering frustration by pandemic. Comparisons have been made between the current pandemic and the Spanish influenza pandemic of 1918, however there do not appear to be any reported cases arising from that pandemic addressing the doctrine of frustration.

To ascertain if frustration applies, one must first construe the contract and see whether the parties have themselves provided for the situation that has arisen. If they have, the contract governs it. A force majeure clause which is intended to deal with the relevant event (a pandemic, in our case) will normally preclude the application of the doctrine of frustration because frustration is concerned with unforeseen, supervening events, not events which have been anticipated and provided for.

The doctrine of frustration allows the contract to be automatically discharged when a frustrating event occurs so that the parties are no longer bound to perform their obligations. Frustrating events must:

  • occur after the contract has been formed,
  • be so fundamental as to be regarded by the law both as striking at the root of the contract and as entirely beyond what was contemplated by the parties when they entered the contract,
  • not due to the fault of either party,
  • render further performance impossible, illegal or make it radically different from that contemplated by the parties at the time of the contract.

An event that has been included in a force majeure provision in the contract will not qualify as a frustrating event. This is also true where the alleged frustrating event should have been foreseen by the parties.

There have been cases where disease was put forward to justify the frustration of a contract.  In an early 20th century case, the judge ruled that in ‘a case where, for instance, a person has engaged a [taxi] to take himself and a party to Epsom to see the races there, but for some reason or other, such as the spread of an infectious disease, the races are postponed. In such a case it could not be said that he could be relieved of his bargain.’  This is not encouraging for those seeking to run a frustration argument for Covid-19 where it is the purpose that has been frustrated (rather than the performance being impossible or illegal).

In another, more recent case arising from the SARS outbreak, the court compared the length of the impossibility with the term of the contract.  A 10-day isolation order prevented the claimant from reaching his flat in Hong Kong. He argued that this frustrated the lease and discharged him from having to pay any further rent. The court disagreed because the lease was for 2 years. A 10-day exclusion from the property was “insignificant” by comparison.

Where does this leave you ?  If there is a written contract, you will need to take legal advice in order to ascertain whether you can rely on the doctrine of frustration because the language of the contract may preclude it.  If the contract does not preclude reliance on the doctrine, a lawyer will advise you on whether in the specific circumstances you are facing, the conditions of frustration are met. 

If the conditions of frustration are met, you will be excused from further performance and you will not be liable for non-performance.  The contract will be recognised as permanently frustrated.  Temporary frustration (in the sense of temporary suspension) of the contract is not recognised. 

If you successfully claimed frustration of a contract, what claims, if any, can be made against you by the other party to the contract after frustration takes place?

First, there are statutory claims. In most cases, your counterparty will have a claim under the Law Reform (Frustrated Contracts) Act 1943. Section 1(2) allows claims for money paid before discharge and section 1(3) allows for recovery of non-money benefits.  There are conflicting cases involving the recovery of non-money benefits.  As a result, it is difficult to predict in advance how a court will now approach the quantification of claims under the 1943 Act. Given the massive number of contracts affected by Covid-19, it is possible that appeals on this issue and other areas of uncertainty will be expedited to give legal certainty to commercial parties as soon as possible, so that other disputes can be settled without litigation. 

Secondly, common law claims are available as an alternative to claims under the 1943 Act.  A common law claim would be in unjust enrichment, likely for total failure of consideration. Well-known difficulties arise for a “total” failure where (as is often the case) the contract is partly performed. 

To summarise, the doctrine of frustration is a way out of a contract but the conditions are strict and the courts are reluctant to allow it.  There may be a wave of sympathy following this pandemic leading the courts to allow more claims for frustration.  If a claim is allowed, the contract will be at an end, and the counterparty is likely to claim some or all their losses from you arising from the frustration of the contract.