Coronavirus & Commercial Contracts: Frustration
Published 6 May 2020
The current situation surrounding the COVID 19 pandemic will inevitably lead to numerous legal issues in relation to commercial contracts. Businesses will be keen to understand how their contractual position may be affected by the pandemic and if so, what remedies are available if it becomes impossible for either party to perform their obligations under the contract.
Whilst the option of envoking the force majeure clause within a contract may be open to the parties, if the contract is silent on the topic of force majeure or if the clause is not all-encompassing, the doctrine of contractual frustration may be an option to consider.
Ordinarily, reliance on the doctrine of frustration is rare given that it can be difficult to prove. However, given the unique and novel circumstances of the current global pandemic, it is likely that more parties will attempt to seek to rely upon it in order to disentangle themselves from difficult contractual arrangements.
What is Frustration?
The doctrine of frustration allows a contract to be discharged if either party cannot possibly perform their obligations under the contract due to an unforeseen event. The rationale behind the principle is to protect against injustice should circumstances change significantly due to no fault of either party. If a frustrating event occurs, the contract is automatically terminated by operation of law and the parties are released from any future obligations.
When does frustration occur?
The threshold for a frustrating event is very high, essentially a contract may be frustrated when:
- A frustrating event occurs (after the contract has been formed);
- The event could not have been foreseen by either party when entering into the contract and it is so fundamental that it goes to the very root of the contract;
- Neither party is at fault; and
- The effect of the event renders the performance of the contract impossible, illegal or radically different from what was contemplated at the outset.
Does the COVID 19 pandemic frustrate your contract?
It is important to note that each contract and situation needs to be assessed on an individual basis however, the key point to consider is whether the current outbreak makes performance of the contract impossible or simply more difficult. If it is the latter, then it will not be considered a frustrating event. In terms of the current Government guidance in relation to social distancing etc. there is a likelihood that it will be impossible for many contracts to be performed whilst remaining compliant with the Government guidance and in the absence of an encompassing force majeure clause, frustration may be an option to consider.
For advice on how your contract may be affected by COVID-19 and how to approach your counterparty or respond to their approach, please contact a member of our Corporate & Commercial team at MKB Law.
This article is for general guidance only and should not be regarded as a substitute for professional legal advice.