Business Contracts and COVID-19: The Doctrine of Frustration04 May, 2020 - Dispute resolution | by Grosvenor Law
The COVID-19 outbreak has created uncertainty and difficulty for businesses, particularly those that depend on large gatherings of people or where people are unable to work in accordance with government guidelines on safety and social distancing. Businesses will be pouring over their contracts to determine what remedies are available if it becomes difficult or impossible for them or their counterparties to perform their contractual obligations.
Businesses may be able to rely on contractual force majeure provisions, which we have examined in a previous blog. However, force majeure provisions usually cover expected events. If force majeure provisions have not been included in an agreement, or have not been drafted to cover events such as the COVID-19 outbreak, then businesses may be able to rely on another remedy: the common law doctrine of frustration.
What is frustration?
Frustration is an English common law doctrine that is used to avoid injustice under a contract. It allows a contract to be set aside when an event occurs which is both unexpected and beyond the control of the parties, and renders the performance of contractual obligations impossible. When a frustrating event occurs, the contract is automatically terminated by operation of law. No action is required by the parties.
What is a frustrating event?
Generally, a frustrating event is one which:
- occurs after the contract has been formed;
- is so fundamental that it strikes at the root of the contract and is beyond what was contemplated by the parties on entering the contract;
- is not due to the fault of either party; and
- renders performance of the contract impossible, illegal or radically different from what was contemplated by the parties at the time of the contract.
Therefore, when considering whether an event is a frustrating event, all circumstances must be taken into account including contractual terms and the factual background.
Will a contract be frustrated by COVID-19?
Businesses will need to consider whether the COVID-19 outbreak renders the performance of each individual contract more difficult, or impossible. For example, if the COVID-19 outbreak merely delays and/or increases the cost of performance of an obligation, the doctrine of frustration is unlikely to apply.
Should a Business invoke Force Majeure or Frustration?
Both force majeure and frustration offer parties relief from their obligations under a contract. However they have different effects on the contract. Invoking force majeure relieves a party from fulfilling its contractual obligations for the duration of the force majeure event. It may not result in the contract being terminated. In contrast, frustration results in automatic termination of the contract.
Generally, the doctrine of frustration will not apply if a contract includes force majeure provisions that cover the COVID-19 outbreak. This is because the parties have already contemplated the outbreak and provided for it in the contract. However, it may still be possible to apply frustration to a contract if the force majeure provisions are not certain or precise enough.
Businesses should carefully consider the background and terms of their contracts, and take legal advice, before invoking frustration. Wrongfully asserting frustration could in itself have the effect of breaching a contract, which may result in a counterparty terminating the contract and claiming damages. Further, before invoking frustration, careful consideration should be given to all the consequences; even if it is legally possibly to do so, it may not always be commercially advantageous.
Akram Shalabi is an associate in Grosvenor Law’s commercial litigation team, where he advises on complex, large scale disputes.
The contents of our blog posts do not constitute legal advice and are provided for general information purposes only