In the worsening Coronavirus pandemic many contractual commitments will now be difficult, if not impossible, for businesses to fulfil, especially given recent government advice on travel and social distancing.
We looked recently - here – at the need to check commercial contracts for force majeure clauses, and to think through whether the particular clause excuses or suspends the need to perform an obligation in the light of specific difficulties caused by the pandemic. But not all contracts will contain force majeure clauses, or if your contract has one, it may not cater for the particular circumstances you are dealing with. Suspending contractual performance, for example, may not resolve the problem, because of the likely duration of the pandemic. What then?
Does a force majeure clause cover the event?
Where the parties have themselves sought to provide for the contingency in question (via a Force Majeure clause which encompasses the event which has occurred or otherwise), the doctrine of frustration is in practice excluded because it is not required.
In all cases, this is a matter of construction of the relevant force majeure clause.
Where the event falls within one of the express categories of a force majeure clause, this will usually be clear. Catch all words like “any circumstances beyond the control of the parties” are likely to create the inference that the force majeure clause was intended to embrace all potentially frustrating circumstances.
But, where a force majeure clause provides only for what is to happen if performance is delayed, frustration will not be excluded.
A contractual right to terminate due to force majeure may in practice supplant frustration entirely. What follows assumes that that is not the case or that any force majeure clause doesn't cover the circumstances that have arisen.
When does frustration apply?
Where something has occurred, after the contract was entered into, which makes it impossible to perform the contract, or renders performance radically different from what was originally agreed, English law may treat it as frustrated. The party claiming that the contract is frustrated will need to show that the frustrating event is so fundamental that it strikes at the root of the contract and is entirely beyond what was contemplated by the parties when they entered the contract. The frustrating event must also not be the fault of either party. It follows that if performance of the particular contract can be shown to be unlawful, proving frustration will probably be more straightforward. Absent government legislation dealing with the Coronavirus directly affecting commercial activity, context will be all important here.
What is the effect of frustration?
If a contract is frustrated the parties are completely discharged from any further liability under it. The contract is "unwound". Legislation provides that, with the exception of expenditure already incurred in connection with the contract, any money or benefit already received must be repaid or returned.
Not a "broad absolving power"
It is very rare for the courts to find contracts to be frustrated. The doctrine is by no means a "free pass". If you claim frustration you will have to show that the failure of the contract is due to an outside event, and is not your fault, so you should first try to fulfil your contractual obligations, even if it proves more expensive to do so than originally envisaged.
Traditionally, the courts have been fearful that frustration will be used as a "broad absolving" power to refashion the parties' contractual relations. More recently, though, they have taken a "multi factorial" approach, looking at
- the contract terms
- the context
- parties' knowledge and expectations, in particular as to risk as at the time of the contract, and
- the nature of the supervening event and the parties' calculations as to the possibilities of future performance in the new circumstances.
In short, you shouldn’t assume that simply because fulfilling your contractual duties has become more difficult or commercially (much) less attractive, any given contract has been frustrated. You should think carefully about what you have contracted to do, and the particular challenges (including taking into account alternative ways of fulfilling your obligations). This should include considering first how the contract might accommodate the new circumstances: is there a force majeure or other clause that might allow you to postpone or suspend particular obligations, or is the contract time critical, for example.
Given the EU lockdown, and the current advice from the UK government, it is likely that many businesses, particularly those with cross border contracts, will want to end contractual commitments on the grounds of frustration. But the process of doing so must be carefully handled. In your negotiations with your counterparty you will need to avoid claiming that a contract is frustrated if you aren't sure that that's the case. You may end up with unexpected liabilities for having repudiated.
On the other hand, if the boot is on the other foot and you think your counter party may have wrongly claimed a contract is frustrated, you should not wait too long, or you'll risk being deemed to have affirmed the contract.
Balanced against all of this is the commercial reality of day to day business, the art of negotiation and commercial relationships that will need to be maintained or reignited once the pandemic is over. All of which creates a tightrope that needs to be navigated with care and precision.
Important – if you have Business Interruption Insurance which may respond to the Coronavirus crisis please also read our article – here.