25 March, 2020
If a commercial contract does not contain a force majeure clause, or COVID-19 is not covered by such a clause, the legal doctrine of frustration may apply. Frustration operates to discharge the contract automatically and immediately where there is a significant change of circumstances, which renders it physically or commercially impossible to perform the contract, or would render contractual performance radically different from the obligations that were originally agreed to.
The threshold for establishing frustration is high; COVID-19 must present a set of circumstances that make it impossible for a party to deliver or perform that which it has contracted to do. Mere inconvenience, hardship, or financial loss involved in performing the contract is insufficient to amount to frustration. A business would be expected to make alternative arrangements in these circumstances.
When a frustrating event occurs, the parties are excused from further performance of contractual obligations and are not liable for damages for non-performance. However, the contract will be permanently frustrated because temporary frustration (or suspending obligations) is not recognised. Unless otherwise agreed by the parties, the law permits recovery of monies that were paid under the contract before it was discharged, subject to an allowance for expenses incurred by the other party.
Over the past week we have seen Governments around the world introducing measures to contain COVID-19 but with the knock-on effect of preventing parties from performing contractual obligations. A party's ability to argue frustration will depend upon the individual circumstances, however measures such as forced business closures, travel restrictions and compulsory social isolation are likely to render contractual obligations impossible.
Parties facing difficulties in these unprecedented times should explore their options including renegotiation, rescheduling or reducing the burden or speed of delivery. There may be contracts of supply or service where both parties are suffering the effects of COVID-19 making renegotiation easier. In circumstances where only one party's contractual obligations are affected, it may be that frustration is used as a bargaining tool to reach a negotiated position.
For advice on and assistance with understanding your position under existing contractual arrangements in light of COVID-19, or reviewing and updating your contracts to ensure their suitability contact John Pickervance, Head of our Commercial department via email or phone on 0333 207 1134. Alternatively send any question through to Forbes Solicitors via our online Contact Form.