The common law doctrine of ‘frustration’ offers an alternative source of release from contractual performance, where (for example) a party cannot rely on a ‘Force Majeure’ clause to excuse its non-performance (because the contract does not include a Force Majeure clause or the clause doesn’t cover a Covid-19 style event).
In essence, the doctrine of frustration holds that a contracting party may be released from its contractual obligation upon the occurrence of an event which:
- renders it physically or commercially impossible to fulfil the contract; or
- radically transforms the contractual obligation into an obligation different from that undertaken at entry into the contract.
The frustrating change of circumstances must arise after the contract has been entered into by both parties. It is to be noted at the outset that the effect of a frustrating event on a contract is to end it. This is to be contrasted with a Force Majeure event which could provide for suspension of activities and obligations for so long as the Force Majeure event continues. It may be the Courts are required (in our view, sensibly) to expand the doctrine of frustration to encompass a remedy that is suspension of contracts and not simply termination. This will be a positive for many businesses who cannot currently perform but do not want the contract to be discharged. We can see this having particular relevance to the commercial property market where tenants are locked out from premises yet Landlords appear to demand rent nevertheless. Clearly this situation is intrinsically unfair and the Courts will be required to rule on it.
The general position on frustration as a legal concept was summarised by Lord Reid in Davis Contractors v Fareham Urban DC  AC 696. He said that if the contract the parties had agreed to, on its true construction, was not wide enough to apply to the new situation arising out of the changed circumstances “…then it is at an end.” This remains an accurate statement of the current legal interpretation, that a successful argument for contractual frustration by definition brings it to close. This means parties arguing for frustration to excuse temporary performance need to think through the broader consequences of that argument.
In the case of Taylor v Caldwell  122 ER 309, which fully established the doctrine, it was clearly acknowledged that where contractual performance is dependent on the continued existence of a person or thing, all parties accept, implicitly, that the perishing of the person or thing shall render performance impossible and the parties shall be excused from performance, thereby ‘frustrating’ the contract.
Circumstances which enable the doctrine of frustration to be relied upon, should include the ‘change’:
- occurring after the formation of the contract;
- striking at the root of the contact;
- being beyond what could have been contemplated by the parties;
- rendering further performance impossible, illegal or making it radically different from what was contemplated by the parties at the time of the contract; and
- not being the fault of either party.
Events which give rise a successful claim of ‘frustration’ are rare and will be dependent on the factual circumstances surrounding the contracting parties.
One of the key differences, between frustration and a ‘Force Majeure’ clause in a contract, is that a Force Majeure clause will clearly outline the categories of events which would excuse a party’s performance under a contract. The doctrine of frustration, however, can operate without the need of a Force Majeure clause to be included in the contract and therefore offers a Court directed contractual remedy.
Spring Law appreciates that the outbreak of the coronavirus, or Covid-19, continues to adversely affect financial and contractual performance for many parties across all sectors of the global economy. It is unlikely that a party to any commercial contract could have reasonably accounted for the possibility of a pandemic, let alone the devastating effects of Government lockdown measures on supply chains and the daily management of businesses.
If a contractual party sought confirmation from the Court on whether the impact of Covid-19 counts as a ‘frustrating’ event, the courts will consider this is light of previous decisions on what circumstances have previously been encompassed in the doctrine.
One decision Spring Law considers to be noteworthy in light of Covid-19 is the judgement of the House of Lords in Pioneer Shipping Ltd v BTP Tioxide Ltd (Nema)  AC 724. In this case a workers’ strike rendered performance radically different as neither party had accounted for this event in estimating the loading time of the Nema commercial vessel. The House of Lords held that it was impact, and not the nature of the interruption, that led to a sufficiently long delay capable of destroying the identity of the service to be performed by the owners of the vessel under the contract.
The development of the doctrine of frustration, however, has been met with various rulings that qualify not only the meaning of a ‘frustrating’ event, but also the effect it has had on performance. Events which have previously been found not to ‘frustrate’ contracts include when:
- the contract merely becomes more expensive to perform in light of an event occurring after formation (Tsakiroglou v Noblee Thorl  AC 93) (we note the similarity with the ‘impossibility’ test when seeking to rely on ‘Force Majeure’ clauses); and
- there are changes in economic conditions only. This occurred in the case of Gold Group Properties Ltd v BDW Trading Ltd  EWHC 323 (TCC), where a deterioration in market conditions, such as a fall in property prices, which was unexpected but not entirely unforeseen, was found to allow for the continuous operation of the contract.
We can conclude with a couple of key observations:
- Courts will be forced to apply the doctrine of frustration to the Covid-19 outbreak and early judicial guidance will provide some useful insight to how the Court will apply it; but
- It is unlikely that the Court will drift too far away from established principles that are always determined on fact specific basis.
Please contact Tim Perry at email@example.com for further enquiries.