HomeInsightsCOVID-19: has my contract been frustrated?

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The effects of coronavirus have been hitting our clients as hard as everyone else. It is saddening to see so many films going on hiatus, deals being cancelled and declining sales. For many their focus for now is on survival and some will be looking to their contracts to understand what they can do to mitigate their losses.

Earlier this week, we published an article on the topic of force majeure and how COVID-19 might interact with force majeure clauses. Since there is no concept of force majeure under English law, contracts will only be terminated by force majeure events if the terms of a contract allow. Whether COVID-19 will constitute a force majeure event will depend how broadly any force majeure clause has been drafted. You can see that article here.

But what if your contract does not have a force majeure clause, or that clause did not foresee a pandemic like COVID-19 and, as a result, is not sufficiently broad to cover the problems you now face? In those circumstances, the common law doctrine of frustration might be able to assist but likely only in the most extreme cases.

Has my contract been frustrated?

A contract will generally be frustrated if an event occurs which:

  1. Was beyond the control of the parties;
  2. Was unforeseen when the parties entered into the contract; and
  3. Makes the contract physically or commercially impossible to fulfil, illegal or radically different from what the parties had contemplated when they entered into the contract.

That the COVID-19 epidemic was beyond the parties’ control will be accepted as read in all but the rarest cases, however whether COVID-19 was unforeseen, and whether it has made a contract impossible to fulfil, illegal or radically different, may cause parties greater difficulties.

Unforeseen

Whether COVID-19 was an unforeseen event will depend when any contract was entered into.

While some, including Bill Gates, have predicted a global epidemic like COVID-19 for years, for the purpose of the test for frustration we would expect the impact of coronavirus on contracting parties in the UK to have been unforeseen in most cases until at least the end of January 2020 when the first COVID-19 case was reported in England, and possibly later when the extent of the disruption which would be caused by the epidemic became clearer.

Parties who might seek to argue that the consequences of COVID-19 were unforeseen beyond 11 March 2020, that being the date on which the World Health Organisation declared a global pandemic, are however likely to face significant difficulties.

If you are currently drafting and entering into new contracts and are concerned about the impact of future government restrictions caused by COVID-19, we recommend that clauses are agreed which deal specifically with any associated risks.

Impossible, illegal or radically different from what the parties had contemplated

Given the scale of the COVID-19 epidemic, its dramatic impact on life and business, and the increasingly severe government restrictions the virus has caused, there will no doubt be contracts which will satisfy the test that they have become radically different from what the parties had contemplated or impossible or illegal to fulfil and thus frustrated.

The courts have, however, set a high bar for satisfaction of those tests. For example, previous cases have established that it will not be enough if:

  1. a contract could be performed in a different way;
  2. a seller is let down by its supplier; or
  3. it has merely become more expensive for one party to perform the contract.

A recent case in which the European Medicines Agency argued that its lease of Canary Wharf offices was frustrated by Brexit serves as a useful reminder of the height of that bar. In Canary Wharf (BP4) T1 Limited & ors v European Medicines Agency [2019] EWHC 335 (Ch), the High Court found that despite the fact that the EMA was required by EU law to move its headquarters from London to Amsterdam post-Brexit (among others), its lease in London was not frustrated. The court found that the change in law did not prevent EMA from performing its obligations under its lease. The court would not allow the EMA to rely on Brexit in order to avoid a bad bargain. The courts will take the same approach in relation to COVID-19.

It is likely to be even more difficult to prove frustration where a contract has many months or years left to run and in circumstances where COVID-19 will only affect the performance of that contract in the short-term.

In a SARS related case in the Hong Kong courts in 2003, a tenant’s claim that his tenancy agreement had been frustrated by an isolation order which prevented him living in the property for 10 days was rejected because, in the context of a 2 year tenancy, the 10 day isolation order was not significant (Li Ching Wing v Xuan Yi Xiong [2004] 1 HKLRD 754). We would expect the English courts to respond similarly.

Divisible contracts

Where one part of an agreement can be severed from another, such as might be the case where a master services agreement has multiple distinct work orders or a package agreement consists of several separate transactions, such an agreement can be frustrated only in part.

Consequences

The Law Reform (Frustrated Contracts) Act 1943 applies to most commercial contracts and provides that where a contract is frustrated, it will be automatically discharged. Further, and importantly, where a contract is frustrated a party money paid can normally be recovered and any money that was due but not paid before the frustrating event ceases to be payable.

Frustration claims will no doubt begin to be made in significant numbers over the coming months. The first judgments on whether COVID-19 was unforeseen by the parties who entered into agreement at the start of this year will set an important precedent for other cases to follow, however judgments as to whether a contract has become radically different from what the parties had contemplated or impossible or illegal to fulfil will, as ever, be highly fact specific. Only the clearest examples of impossibility, illegality and radical difference will be found to have been frustrated by COVID-19.