The current crisis is likely to bring principles of contractual law, such as frustration, to the fore.  Here Mark Harper QC sets out the basic principles and considers the  practical issues arising out of coronavirus.

 

THE PRESENT PANDEMIC

The present pandemic will impact on the ability of parties to perform contracts and will inevitably engage a consideration of the doctrine of frustration, a doctrine no doubt remembered from academic study because of Krell v Henry [1903] 2 KB 740 (the contract to hire rooms from which to view the coronation of King Edward VII – cancelled due to His Majesty’s illness) but rarely engaged on a day to day basis outside of the Admiralty jurisdiction.

The impact on the ability of parties to perform contracts will be in a whole host of different circumstances. In view of the breadth of the subject, the potential different applications and the “multi-faceted” approach (see below) this paper can only be an overview with a view to identifying some of the relevant issues that can arise.

Whilst this is going to be of interest to litigators, those advising or acting for clients in the day to day operation of their business need also to be aware of this. Relevant to the operation of the doctrine will be whether or not the parties foresaw the impact of the pandemic on their contracts at the time they entered into them (see below). Businesses that are continuing to enter into contracts at this time need to consider this and how they will provide for the same in their contracts.

The principle:

“A contract may be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract”[1]

It is an objective test by reference to (a) terms of the contract, (b) the circumstances in which it was agreed, (c) the parties’ assumptions and expectations, (d) the nature of the event and (e) the parties’ intentions in the new circumstances.[2] A “multi-faceted” approach.[3]

Contractual Terms

The starting point in any case will be the terms of the contract. Many contracts will include terms that provide for what is to happen in the event that something happens that prevents/delays performance.

For these terms to operate and avoid the contract being frustrated they must (a) cover the supervening event[4] and (b) make complete provision for all the issues arising[5]. These are the key considerations.

If there are such terms, then the contract is ordinarily operative save that such clauses cannot be relied upon to require performance that would be illegal[6].

For example:

A agrees to provide B with a hospitality package at the Monaco Grand Prix 2020. The Grand Prix is cancelled by Formula 1 due to the pandemic. The contract provides that in the event of a cancellation of the Grand Prix by Formula 1 for whatever reason A and B agree that the hospitality package will be provided at the re-arranged event or, if there is no re-arranged event, the Grand Prix in 2021.

The contract is not frustrated as the parties have agreed how to address a cancellation of the event and the allocation of risk in that regard.

A agrees to provide B with a venue for a wedding including a wedding breakfast and licensed bar. The contract provides that in the event that, due to whatever reason, A is not able to provide any part of the agreed package the contract will continue in respect of the remainder of the package with a proportionate reduction in price. Due to the pandemic A can provide the venue and the licensed bar but not the wedding breakfast as it has insufficient healthy staff.

The contractual provisions would not be sufficient to avoid frustration as it does not provide a complete provision for all issues arising and only excuses A from the consequences of what would otherwise be a breach of contract.

Other clauses to consider are delay clauses, price-acceleration clauses etc.

WARNING

If parties enter into a contract at a time when they foresee that the pandemic might impact on the performance of the same in the future then, even if they do not contractually provide for what is to happen, this will generally rule out the contract being frustrated.

Supervening Illegality

If it becomes illegal to perform the contract (e.g. because the Government decrees that the event cannot take place) then that ought to be straight forward as the authorities (primarily from World War II) show that supervening illegality is a frustrating event.

Other Cases

The difficult cases will be those that fall in between those where there is clear contractual provision for what is to happen and those where there is supervening illegality.

The following are examples to consider:

A and B’s wedding is cancelled as the venue is, consequential upon the pandemic, prohibited by law from hosting the same. A and B have various contracts with other businesses to provide goods and services for the wedding.

Are those contracts frustrated? Depends on the contract, the foundation of the same and the reason the same cannot be performed.

For example: a contract with a band would be frustrated if the legal measures that had led to the cancellation of the wedding also led to a prohibition on the performance by the band. However; a contract with a florist would not be unless (in the unlikely event) the contract was founded on the wedding proceeding – the wedding not proceeding does not prevent the preparation and delivery of the flowers.

A is an independent computer consultant. A is retained by B for a period of 2 months (by reference to specific dates) to provide services at B’s premises. A is a vulnerable person and is advised to self-isolate for 3 months such that the contract cannot be performed.

Is the contract frustrated? It should be as it is, for reasons out-with the control of A, impossible for the contract to be performed. It is extremely unlikely that a Court would find that there was a possibility of performance where performance would be contrary to Government advice and at risk to the health and life of A.

A is creating an product for B at a fixed price of £100,000 for a specified date 6 months later. Due to the pandemic A loses 50% of its workforce with the result that the contract costs it £150,000 over its agreed budget and causes it to be 6 months late in delivering the product. A wants to treat the contract as frustrated.

The contract would not be frustrated as it was still capable of performance albeit more onerously and at greater cost than had been anticipated.[7]

A has a contract with B for the provision of schooling for the summer term. The school is closed down at the direction of the Government. The school in anticipation of this has made arrangements for the pupils to have materials to work on at home and to receive remote learning. A wants to treat the contract as frustrated.

This is a very difficult example and will primarily be determined by what precisely the contract required by way of performance. Instinct dictates that, subject to the foregoing, the contract will not be frustrated as the school is still providing performance.

Conclusion

I hope that this has given an adequate overview of the doctrine of frustration so that clients whose past, present and future contracts potentially engage the doctrine can be identified and  advised accordingly.

I send you and yours all the best during these unprecedented times.

 

 

 

 

 

 

 

 

 

 

 

 

[1] Chitty on Contract 32^nd Edition [23-001]

 

[2] Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd [2007] EWCA Civ 547 at [111].

 

[3] Natixis v Famfa Oil Ltd [2020] 2 WLUK 330 at

[4] Metropolitan Water Board v Dick Kerr & Co Ltd [1918] AC 119

[5] Bunge SA v Kyla Shipping Co. Ltd [2012] EWHC 3522 at [80]

[6] Ertel Bieber & Co v Rio Tinto Co Ltd [1918] AC 260

[7] Davis Contractors Ltd v Fareham UDC [1956] AC 696 at 716