Can an agreement be terminated for frustration due to coronavirus (COVID-19)?

Can an agreement be terminated for frustration due to coronavirus (COVID-19)?

What is the doctrine of frustration?

If the contract does not include a force majeure clause or it does but the applicable force majeure event is not included, it may be possible for the parties to rely on the common law doctrine of frustration. A contract will be discharged by frustration if after formation, an event occurs which renders further performance of the contract impossible, illegal or something different from what was contemplated by the parties when entering into the contract.

Frustration is not a straightforward doctrine to rely on, however, as it is dependent on interpreting the true construction of the terms of a contract in the context of the nature of that contract and the relevant surrounding circumstances when it was made. If there is a radical difference between the original contractual obligation and the performance that is possible due to a change in circumstances, the doctrine of frustration may apply.

Successful reliance on the doctrine of frustration is dependent on the parties having not made provision for a specific set of circumstances in the contract as regards the event that is alleged to have frustrated the contract. Equally, the doctrine of frustration only applies where the supervening event is beyond the control of the parties. It cannot be invoked therefore, by a party keen to escape what they may now consider to be a bad bargain, in that a contracting party cannot rely on their own default, to excuse them from liability under the contract. Alternatively, if the parties have made express provision in the contract for the event that has alleged to have frustrated the contract, the doctrine of frustration will not apply.

The effect of frustration is that the contract is brought immediately to end and both parties are released from any further performance.

For more information on the doctrine of frustration, see Practice Note: Discharge by frustration and Commentary: Impossibility: Halsbury’s Laws of England [258].

Is coronavirus (COVID-19) a frustrating event?

Whether coronavirus (COVID-19) frustrates the contract in question, will vary on a contract by contract basis as it has the potential to impact different contracts in different ways. It will essentially depend upon whether the existence of coronavirus renders further performance of the contract impossible, illegal or something different from what was contemplated by the parties when entering into the contract.

In determining whether coronavirus frustrates a given contract, the courts will:

  • construe the terms of the contract in light of the nature of the contract and the circumstances in place at the time the contract was made
  • examine the situation existing after the occurrence of coronavirus and ascertain how the parties’ contractual obligations would be performed if the words of the contract were enforced in the new circumstances
  • compare performance of the relevant contractual obligation in the original circumstances (the old obligation) with performance of the same obligation in the new circumstances (the new obligation)
  • in light of the comparison, determine whether the new obligation is a radical or fundamental change from the old obligation

The coronavirus pandemic has seen government decrees, quarantine zones, travel bans, cancellation of events and the introduction of emergency legislation, as well as the human cost of the disease, illness and death. These types of events fall into certain categories of event which have previously been considered by the courts as frustrating events, including

• a change in the law:

◦ by Act of Parliament/other legislative action, performance of a contract is prevented

• subsequent illegality:

◦ where the contractual place of performance is abroad, and under the foreign law governing that place, performance becomes illegal after formation of the contract but before performance, the contract will not be enforced in England (Ralli Bros v Compania Naviera)

•cancellation of an expected event:

◦ only amounts to frustration in exceptional circumstances, eg contract to hire rooms on particular days to view the coronation of King Edward VI was frustrated where the procession was cancelled at short notice and the commercial purpose of the transaction was destroyed (Krell v Henry)

• delay:

◦ it is a question of degree whether delay amounts to frustration

◦ delay must be abnormal (in cause, effects or expected duration), ie such as to fall outside the parties’ reasonable contemplation at the time of contracting

◦ length to be assessed by reference to nature of contract (Sir Lindsay Parkinson & Co v Comrs of Works)

◦ delay that causes mere hardship or inconvenience to the parties is not sufficient (Davis Contractors)

• death:

◦ applies to contracts for personal services where, on true construction, the contract is required to be performed by original contracting party

• illness/incapacity:

◦ may apply to employment contracts

◦ whether the contract is frustrated depends on whether the employee’s illness/incapacity is of such a nature that future performance of their contractual duties becomes impossible or radically different from that envisaged by the contract

Can I terminate my contract?

If a party is considering terminating a contract because the other party is unable to deliver, then generally the right to terminate a contract only arises if one party has committed an anticipatory or repudiatory breach of contract. If a party to a contract is not performing its obligations under a contract, they may be in breach of contract. In order to determine if another party is in breach it will be necessary to understand the scope of that party's obligations under the contract by considering its terms, together with how the court is likely to ascertain the meaning and legal effect of the contract.

Once the terms have been considered it is then necessary to determine whether the party’s actual performance is in line with their obligations under the contract.

For more information on breach of contract, including information regarding acceptance of, or affirming the breach, see Practice Notes: Termination for breach of contract and Consequences of termination boilerplate clauses together with: Contract termination—checklist and the following Precedents: Deed of termination of contract and Termination clause.

What other contract management options should I consider?

Coronavirus may constitute an event of force majeure under the terms of the contract. For further guidance, see Practice Note: Discharge by force majeure.

Consider contacting the other contracting party to see if it is possible to resolve any contractual issues through sensible dialogue. Challenging times may encourage co-operation and both parties may be open to agreeing a mutually beneficial variation to the terms of the original contract to bridge the issue. See Practice Note: Contract variation and Contract variation—checklist. See also, Precedents: Deed of variation and Variation agreement.

For further risk management considerations, see: Contract risk management clauses—checklist. See also Practice Notes: Managing a trading relationship with a business in financial difficulty and Reviewing commercial contracts to minimise financial difficulties.

Finally, check the availability of insurance cover.

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