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Coronavirus: contractual frustration

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The Covid-19 outbreak could, possibly, amount to changed circumstances which fall within the scope of the doctrine of frustration, but this is not automatic, and each case will fall to be judged on its facts. Performance may be impossible as a result of regulations issued by the government. 

What is frustration in legal terms?

When a contract is frustrated (which is uncommon) the parties are discharged from performance of their contractual obligations and the contract is declared void. 

Frustration only arises where (after formation of the contract) performance of the contract becomes impossible to perform or radically different to that which was envisaged.

Any contract entered into, after the Covid-19 outbreak became known, is less likely to be frustrated because the parties knew of the problem in advance of contract formation, save in relation to those contracts the performance of which is now rendered impossible, due to legislation coming into force after the formation of contract.

There are various factors when determining whether a contract has been frustrated:

Has the contract allocated the risk of the particular event occurring?

If the parties allocated the risk of loss between themselves within the contract, then frustration is not applicable. So, if one party agrees to take the risk of losses arising due to the C-19 outbreak, then frustration is not available, although this does not seem likely given the unprecedented situation we are in. Any acceptance of the risk of non-performance due to C-19 will negate the doctrine of frustration. 

Has there been a radical change in obligations?

The case law in this area has set precedents as to what might be frustration of a contract. In this summary, we will not detail all of these precedents.

The Government has announced restrictions on businesses and those who do not follow will be issued prohibition notices. If these are not complied with, fines can be issued alongside the loss of alcohol licences. There is no upper limit to the fines for businesses who continue to ignore the restrictions which have been put in place. 

If a contract cannot be performed without breaking a law which has been passed, after the contract was formed, then it may be frustrated on the grounds that it would be illegal to perform the contract (so long as the impact is serious.) So, a contract to stage an event in a public place might be frustrated if a law is passed banning public events at such a place and such prohibition is more than temporary. 

If the length of time of the C-19 outbreak is such that the event could be postponed, then the parties may have to wait for this period and then continue with their contractual obligations. The courts will consider and look at the period of the contract and the period of the illegality in order to assist them with a finding of frustration. A contract for a period of time is less likely to fall within the doctrine of frustration than a contract for a one-off event. The one-off event may be frustrated if it cannot proceed as planned, whereas the contract for a period of time may be rendered impossible to perform for a window of time within the overall duration of the agreement, but it is not impossible to perform the contract as a whole.

Outbreak of war has been a cause of frustrated contracts. In some quarters, the C-19 outbreak has been compared to a war footing, but it is not a given that the courts will take the same view. 

In theory, delays and interruptions can frustrate a contract, but this is less likely if the delay is temporary. How long will C-19 last? Is it temporary or not? These are fine judgements in each case.

If one party is at fault for the frustrating event, it is less likely that the contract will be frustrated.

The effect of frustration

Frustration brings a contract to an abrupt end. The agreement becomes void.  This is not discretionary.  The contract terminates.  It is not suspended. Under common law, all obligations under the contract cease and losses lie where they fall. Where money is paid in advance, then advance payments may be recoverable if there has been a total failure of consideration by the counter- party.

The Law Reform (Frustrated Contracts) Act 1943 confirms that money already paid is recoverable, and money that is payable does not need to be paid so long as there has been a total failure of consideration. The courts have a discretion to allow the counter-party to retain any advance payment to cover any expenses incurred, so long as the retained money does not exceed the intended advance payments, and is a form of insurance for the contract; and does not exceed the actual value or the actual expenses incurred where no advance payment has been made, there is no compensation for expenses incurred in the performance of a frustrated contract, but if partial performance of the contract confers a benefit on the other party, prior to the frustrating event, the court has discretion to allow a claim for the expense incurred in conferring such benefit. 

Frustration is a draconian remedy. The whole contract is void and the relationship broken. This might suit some, but not every situation. For this reason, frustration is not automatic, and a careful examination of each contract and the circumstances of the case is required. Care must also be taken not to rely on frustration so as to void contractual obligations which may then amount to a repudiatory breach of contract if the doctrine of frustration is not upheld by the courts. Proceed with great caution.

What to do next

  • Check if you have a written agreement in place, which could be in the form of standard terms and conditions, or an order form.
  • There may be some benefit in beginning early discussions with the other party. However, you should complete a thorough assessment of your position prior to doing this. 
  • Follow government guidance or guidance from your governing or trade body, if applicable, prior to taking any action, including any discussions with the other party. 
  • Get in touch with Gateley before acting or sending any kind of communication to ascertain your legal position based on your current circumstances.

For further information contact one of our experts listed below.

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