• Avinder Laroya

Worried About Your Contractual Obligations Due To The Impact Of COVID-19?

Updated: Feb 8, 2021

How The Doctrine of Frustration Could Help You Get Out Of Your Contractual Obligations

What is the Doctrine of Frustration and when can it be used?

During the Coronavirus crisis, issues around contractual performance and complying with contractual obligations in the supply chain has been a particular concern and an area of contention to parties within an agreement. Under English law, if there is no express Force Majeure provision within the agreement, the party seeking to be relieved of their contractual obligations may aim to use the Doctrine of Frustration in the event that it is no longer possible to perform the obligations laid out within the contract.

Circumstances in which the Doctrine could be used include:

· The occurrence of an event, which was not considered by the parties when they decided to enter the contract;

· Said event being important enough to be considered as affecting an obligation which is crucial to the contract;

· The contract terms becoming impossible to perform (due to the COVID-19 pandemic) or should the contract be performed; it would be profoundly different from what was agreed upon;

· The inability to perform the obligations agreed upon is through no fault of either of the parties.

On the other hand, there are a number of circumstances in which a contract cannot be frustrated. For example:

· A contract becoming more difficult or expensive to perform than initially estimated;

· The inability to perform the obligations agreed upon is the fault of one (or both) of the parties);

· The contract containing a Force Majeure clause;

· The possibility that the frustrating event could have been reasonably foreseen.

As a result, there has been speculation over the use of the Doctrine of Frustration in cases in which a party is unable to fulfil their obligations as a result of the Coronavirus pandemic. Despite the unforeseeable nature of the COVID outbreak, it must still be proven that the failure to perform is as a direct result of the said outbreak to deem a contract frustrated for this reason.

What determines if a contract has been frustrated by the Coronavirus outbreak?

For the law to deem a contract frustrated for all purposes, it must be proven that it would be unfair and inappropriate to compel the obligated party to adhere to said obligations. The impact of COVID-19 upon a contract depends on several factors, such as:

· The type of contract;

· The type of goods or services agreed to be supplied;

· The performance terms in the contract;

· How the supervening event interferes with each party’s obligations to perform the contractual commitments.

The team at Serenity Law LLP are experienced in commercial contract law and aim to do what’s best for our clients, whether this is a renegotiation of terms, assisting you with legal claims or advising on your options if you are unable to perform your contractual obligations. If you have any concerns over how the Coronavirus, or indeed any other disruption, has impacted upon your ability to fulfil your contractual promises, please contact us on 0800 019 7773 or click the link for a 30-minute free consultation with one of our specialist lawyers.

Why is the Doctrine of Frustration important in English contract law?

There was once a time in English law whereby the law held that parties must always perform the obligations of their contract, regardless of what unfaultable hardships may occur. This, of course, lead to parties becoming trapped in contracts which a fair and reasonable person would deem impossible to fulfil. In the 19th century, this changed, allowing parties the opportunity to terminate their contract once proven that there was no other way forward.

In Taylor v. Caldwell [1863], the opinion of Justice Blackburn went on to establish what is today known as the Doctrine of Frustration. In the case, Caldwell & Bishop owned Surrey Gardens and Music Hall, but agreed to rent it to Taylor and Lewis for £100 per day for the use of concerts and fetes. Before the first event went ahead, the venue burned to the ground.

Justice Blackburn held that, as neither party were to blame, both were to be excused of their obligations. This was the beginning of the change in contract law as we know it in England today, offering reasonable opportunity to be relieved of a contract should there truly be no other option for parties unable to perform through no fault of their own.

What issues are encountered by parties trying to use the Doctrine of Frustration in England?

Although there can be various routes to proving a contract is frustrated, there is no variance in the consequences of frustration – It automatically brings the contract to an end with immediate effect as opposed to extending deadlines or coming to another mutually agreeable solution via mediation or similar dispute resolution method. Comparably, where a Force Majeure clause has been included in the contract, the provision would usually be to suspend the contract until such a time that it can be performed. This raises various issues for the contracted parties, with reputation, relationships and finances all being impacted.

An example of a party claiming their contract had been frustrated was in the case of Davis Contractors v. Fareham UDC [1956]. The contract required Davis Contractors to build 78 houses for Fareham UDC in the space of 8 months. The agreed fee was £85,836. As a result of issues in supply of materials and staffing, the project went considerably over budget and took almost three times as long to complete. Fareham UDC paid the agreed fee of £85,000, but Davis Contractors felt that the contract had become frustrated as they weren’t able to perform as a result of the issues they faced. In this case, the presiding judge did not agree. It was stated that, despite the additional costs they incurred, Davis Contractors were still able to perform their promise, therefore the contract was not frustrated.

When a Force Majeure clause has been included in a contract, the negotiation over where costs will fall in the event of an “act of God” will have already been determined, likely falling where they lie. In the case of no such clause being available, issues arise as there may be financial complications for one or both parties. Generally, monies paid by a party under contract before the key event can be recovered but monies due to be paid will no longer be payable. This was defined in the Law Reform (Frustrated Contracts) Act 1943, following a case whereby a room was rented for the purpose of viewing the King’s coronation. The case of Chandler v. Webster [1904] arose when the coronation was cancelled, and therefore Chandler had paid for the room even though the event was no longer set to occur. It took many years, but the 1943 Act provided better protection to the paying party in the case of a contract becoming frustrated.

Manage Your Contracts During COVID-19 – Top 3 Tips from a Contract Law Expert:

1. Ask a lawyer to check the contract terms to determine whether a pandemic is covered. If not, take legal advice before taking your next steps to avoid issues of wrongful termination as a repudiatory breach.

2. Explore all avenues to ensure you’re not applying for the contract to be deemed frustrated without the need to go this far. Where possible, consider working with your lawyer to revise and renegotiate contract terms, perhaps extending deadlines or reducing expected outlay.

3. Remain amicable wherever possible. As a result of the worrying and unpredictable times we find ourselves in, tensions are bound to rise. Appoint a mediator or use arbitration to settle your dispute, with the aim to come to a compromise that suits both parties.

Ask An Expert

If you had asked everyone you know what they expected 2020 to have in store for your business, it’s very unlikely that anyone would have foreseen a global outbreak of a virus capable of killing tens of thousands of people in a short space of time, rendering your business unable to perform its contractual obligations. And if they did, you probably would have assumed they had watched the latest Hollywood blockbuster! Ultimately, the events of this year could not have been reasonably expected and, where possible, we encourage parties to work together to come to a solution that makes commercial sense.

Co-founding partner of Serenity Law LLP, Avinder Laroya, is a trained Mediator and Arbitrator and has experience of complex cross-border disputes, supporting her clients in considering and agreeing upon the best outcome. In addition, our team are corporate lawyers, offering a COVID-19 Business Resource package to ensure your business performs as well as possible throughout the pandemic and into the new normal.