The ongoing global coronavirus COVID-19 outbreak is creating uncertainty and difficulty for enterprises worldwide, particularly those whose business depends on large gatherings of people. We’re advising many such businesses on protecting their legal rights and mitigating the worst economic effects of the virus.
Businesses are keen to understand how their contractual position might be affected by the coronavirus COVID-19 outbreak and what remedies might be available if it becomes difficult or impossible for their counterparties to perform their obligations. One potential remedy may be contractual force majeure provisions – read our recent article on force majeure here. Another is the doctrine of frustration, which may be relevant if the contract contains no force majeure clause covering coronavirus COVID-19 issues.
Frustration is difficult to prove, but where an extreme event like the current coronavirus COVID-19 outbreak occurs, you’re more likely to see counterparties seeking to rely on it to extricate themselves from difficult contractual arrangements. You should, therefore, consider whether the coronavirus outbreak might place your contracts at risk or provide you with an opportunity to exit on frustration grounds, and what your response to, or case for, frustration might be.
What is frustration?
Under English law the doctrine of frustration allows a contract to be discharged when an unforeseen event occurs that renders the performance of the contract impossible. The purpose of frustration is to avoid injustice where there has been a significant change in circumstance and neither party is at fault. Where a frustrating event occurs, the contract is automatically terminated by operation of law without requiring any action of the parties.
When will a contract be frustrated?
The threshold for frustration is very high, and the test is strict. A contract may be frustrated where:
- the frustrating event occurs after the contract has been formed;
- the event is beyond what was contemplated by the parties on entering the contract and is so fundamental that it strikes the root of the contract;
- neither party is at fault; and
- the event renders performance of the contract impossible, illegal or radically different from what was contemplated by the parties at the time.
In considering the last point, all relevant factors must be taken account of, including the contractual terms and the factual background – particularly the question whether the parties considered what would happen (and whether the contract would be performed) if the frustrating event occurred. In the context of leases, whilst frustration could technically apply to a lease, this is likely to be very difficult to prove in practice.
Will the coronavirus outbreak frustrate your contract?
You’ll need to consider the terms and background of each of your contracts individually. The key question is whether the coronavirus COVID-19 outbreak makes performance of a contract impossible, or only more difficult. The latter will not result in the contract being frustrated. For example, if the coronavirus COVID-19 outbreak merely delays performance of an obligation, or increases the cost of doing do, it’s highly unlikely frustration will apply. Similarly, if coronavirus COVID-19 results in a tenant being temporarily unable to occupy its premises in England, it is unlikely that it will be able to argue successfully that its lease has been frustrated.
Frustration or force majeure?
Generally, where a contract contains a force majeure clause that engages specifically with the issues raised by the coronavirus COVID-19 outbreak that are said to give rise to frustration, frustration will not apply, because the parties have already considered that issue and provided for it in the contract. However, if the force majeure clause is not full, complete or specific enough (e.g. there’s room for debate on whether it covers the event in question), it may still be possible to invoke frustration.
Should you argue frustration?
Both force majeure and frustration offer contractual parties relief from their obligations. But there’s a crucial difference: a force majeure event may not result in the contract being terminated (it simply relieves a party from complying with the obligation subject to force majeure), whereas frustration results in automatic termination.
Depending on your rights and obligations under the contract, it may not be commercially astute or legally appropriate to invoke frustration – for example, where the contract contains long-term rights and obligations that won’t be rendered impossible by the temporary effects of the coronavirus COVID-19 outbreak.
Further, the consequences of wrongfully asserting frustration may be severe: a mistaken allegation may amount to an anticipatory or repudiatory breach of the contract, which may result in the counterparty itself terminating the contract and claiming damages. You should, therefore, give careful consideration and take legal advice before asserting frustration.
For advice on how your contract might be affected by the coronavirus COVID-19 outbreak and how to approach your counterparties, or respond to an approach, on those issues, please contact Jamie Curle (Partner, London) or Charles Allin (Senior Associate, London).