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Coronavirus and Contracts: Is Frustration in Play?

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About The Author

Callum Reid-Hutchings (Regular Writer)

Callum is a BPTC student from City, University of London and student member and scholar at Gray's Inn. Callum recently graduated from Swansea University with First Class Honours and is due to commence his LLM at Wolfson College, Cambridge University. He has interests in commercial, sport, public and medical law. Outside of law, Callum has a keen interest in football, boxing and MMA.

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The doctrine of frustration is a novel element of English contract law whereby the courts may release the parties to a contract from their obligations due to some supervening event. A creation of common law, frustration is less of a concrete rule and more of a tool in the hands of the courts, usually narrowly and strictly applied. Even the legal justification for frustration is a subject of debate.

In short, frustration is rare. The courts are reluctant to relieve parties’ obligations due to a mere bad bargain, and force majeure clauses are common enough in today’s commercial contracts to make frustration moot in many cases. However, the current disruption caused by COVID-19 has caused an uptick of interest in frustration from both clients and practitioners. This article will review (briefly) the doctrine of frustration, explore some of the situations due to COVID-19 which may raise questions about the doctrine, and attempt to offer a starting point for answering them.

What is frustration?

Frustration exists to mitigate some of the harshness of the absolute contract rule (see Paradine v Jane [1647]), where parties to a contract were bound by it no matter the circumstances. The courts first developed the rule in Taylor v Caldwell [1863]. In that case a music hall burnt down, preventing Taylor from performing concerts in it as contracted. The court found that performance of the contract, now being impossible, had been frustrated.

However, the jurisprudential basis of the doctrine of frustration has historically been contested. Broadly speaking there are two camps – one that sees frustration as implying a term into the contract (as in Taylor v Caldwell, “if the music hall no longer exists, the Parties shall be released”), and another that sees frustration as a judicial intervention to prevent unjust results. This debate, and the more recent synthesis approach since Iran Shipping Lines [2010], is covered in more detail in Jamil Mustafa’s article from 2017.

Put simply, however, the rule considers what it is fair and equitable to hold the parties to, taking into account the unforeseen circumstances. Subsequent cases modified the Taylor v Caldwell doctrine to include circumstances which were so “radically different” from what the parties had envisioned as to render performance inequitable. Lord Radcliffe’s notion in Davis Contractors Ltd v Fareham UDC [1956] is a famous starting point:

“Frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.”

Lord Simon in National Carriers Ltd v Panalpina (Northern) Ltd [1981] gave a further definition, that frustration occurs when a contract makes no sufficient provision for circumstances which change the nature of the contract, and because of these supervening events it would be wholly unjust to hold the parties to the contract in the new circumstances. Therefore, the court should discharge the parties from the contract.

The facts of the case are what is ultimately going to decide whether the contract is indeed frustrated. Taking the precedent from Davis Contractors, would the supervening event mean the performance of the contract would be ‘radically different’ to what was previously agreed? There is no exhaustive list of circumstances and each case will have to be viewed individually. Nonetheless, case law provides some guide on circumstances which would tend to indicate frustration:

  • The supervening event took place after the contract was concluded;
  • The event intervenes with the nature of the contract such that it was not what the parties could have contemplated;
  • Neither party caused this to happen; and
  • Performance is now impossible, illegal or is radically different from what was agreed between the parties.

What contracts could COVID-19 affect?

The COVID-19 regulations have brought about restriction of movement, closure of retail shops and other businesses, and bans on mass gatherings with notable events such as Wimbledon and Glastonbury cancelled. This has caused intense commercial disruption for businesses, but has also impacted ordinary individuals – for instance, many who have booked weddings in this period are discovering that insurance policies do not cover their costs for such an event.

Put simply, almost all commercial contracts will be affected by COVID-19 due to the severe restrictions which have been placed on activity by the government, and the secondary economic impacts. Businesses are keen to disentangle themselves from contractual obligations while also limiting financial damage, to such an extent that the Competition and Markets Authority has announced an investigation into businesses denying refunds and cancellations, and reminded business that their current hardship is not an excuse to infringe on consumer rights.

Internationally, the logistics and shipping industry are facing a downturn in demand while dealing with national quarantine rules. Frustration and force majeure will be of particular interest to clients where such rules have rendered the movement of goods impossible or illegal.

A particularly interesting situation is developing around university leasing and teaching. As universities have turned to online teaching, with many telling students to return home, there is an argument that the nature of their contracts with students has become “radically different”. Universities and the government have argued that tuition fees will apply as usual as online teaching is “equivalent” in quality, but there is certainly an argument to be had. As one student quoted by the BBC put it:

“I pay tuition fees to go to my university in person, to be taught at my university in person, to access the facilities of the university - libraries, societies, sports facilities - in person.”

It would likely be an uphill battle to say this is ‘radically different’ from what was previously agreed, but fine distinctions could lead to some interesting results in the coming months, and the universities sector will be one to watch, particularly given the not-quite-commercial nature of agreements between students and education providers.

Will frustration be applied due to COVID-19?

Whether COVID-19 could be considered a frustrating event primarily depends on the nature of the obligations to be performed. Despite the pandemic being a major issue, it is more likely to be the government regulations which could inconvenience a contract than the virus itself. A crucial aspect is that these regulations are not to be permanent. Temporary unavailability could in theory render a contract frustrated, but the courts will look to see the length of the contract.

Delay or temporary postponement will only frustrate a contract if it defeats the commercial purpose of that contract. Therefore, if a contract lasts for a substantial time longer than this postponement period it will be unlikely that a contract will be frustrated – this is likely the case for many commercial contracts. Likewise, “defeating the commercial purpose” is not the same as rendering an agreement uncommercial (ie. unprofitable). If the contract can still be performed but is merely more difficult or less profitable, then frustration probably won’t succeed (Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962]).

In some cases, supervening illegality can frustrate a contract (Fibrosa SA v Fairbairn [1943]), but in the current situation, the illegality of any contracts is likely temporary. If the expected period of illegality is short enough, the contract will not be frustrated and the parties will simply have to wait out the period of time before continuing the contractual obligations.

It is also important to mention that frustration will come after the consideration of any force majeure clause, which most modern commercial contracts will include. The wording of the clause is highly relevant and if it caters for the particular supervening event, it is very unlikely that frustration would be used as a legal remedy.

Whether a contract can be performed is a question that will be considered on a contract by contract basis, and it bears repeating again that the courts traditionally take an extremely strict view. An interesting sentiment expressed by Vaughan LJ in Herne Bay Steam Boat v Hutton [1903] is worth reviewing. In that case, the defendant hired out a steamship to view the Naval Review during King Edward VII’s coronation. The Naval Review was subsequently cancelled, but the contract was not cancelled, and Vaughan LJ argued:

I see nothing that makes this contract differ from 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 dictum is perhaps too appropriate to the current situation. Vaughan LJ’s point is that the taxi was not specifically advertised to provide services to Epsom, it was merely to provide a taxi service.

Conclusion

Frustration most likely will not see widespread use in the current situation, for three main reasons.

Firstly, parties to commercial contracts typically cater for such events via force majeure clauses - and those who didn’t before certainly will in the future.

Secondly, lockdown measures are intended to be temporary, meaning parties to a contract may just have to wait it out before resuming performance – increased expense and inconvenience is not enough for a contract to be frustrated.

Thirdly and finally, it may not be commercially sensible to do. Almost every business has been adversely affected the pandemic and for a company to try and get out of contractual obligations by using frustration may not be seen as commercially wise– particularly given how unlikely it is to succeed – as it could easily create tension between parties that will complicate future negotiations and agreements. COVID-19 will eventually depart and business will go back to some degree of normality. Resorting to frustration may not be in a business' best interests in the long term – if it is even possible at all.

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Tagged: Commercial Law, Contract Law, Courts

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