Can coronavirus frustrate contracts?
Coronavirus fallout
Thousands of business in the UK are unable to meet their contractual obligations due to the coronavirus pandemic. It’s likely that this situation will carry on for many months.
It’s been suggested that the coronavirus outbreak is a “frustration” of contract situation, meaning that the parties to commercial contracts can automatically walk away from their obligations without any liability whatsoever. Is this true?
Legal reality
A commercial contract can be discharged using the principle of frustration if an event occurs which renders its performance impossible, illegal or different from what was contemplated by the parties when they entered into it.
However, whist the contractual principle of frustration can be helpful, it’s not straightforward or automatically available.
Force majeure clause
If a commercial contract already contains a force majeure clause - and many do - neither party can rely on the contractual principle of frustration.
A force majeure clause basically excuses one or both parties from having to perform their contractual obligations where a “major unforeseeable event” that’s outside of their control occurs. We looked at force majeure clauses and the coronavirus implications in a previous article ( yr.21, iss.13, pg.1 see The next step ).
No clause?
Assuming the contract doesn’t contain a force majeure clause, whether or not coronavirus is a frustrating event will depend on the contract in question. Generally speaking, the courts will only allow frustration arguments to succeed where something happens at short notice, rendering performance of the contract impossible.
In many cases, particularly where a commercial contract was entered into after the pandemic situation was declared, coronavirus won’t be seen as an unexpected event because of the official advice and government information that was already circulating in the public domain.
Tip 1. However, if a contract can’t be performed due to a change in the law, government directions on what industries may operate or social distancing measures (and there’s no force majeure clause in the contract), frustration may be an option.
Tip 2. If a contract can be performed but there will be a delay, frustration arguments will only succeed where that delay is “abnormal” and it was outside the parties reasonable contemplation at the time they entered into the contract.
Tip 3. Each contractual situation will be different. If you believe a commercial contract has been frustrated but you’re unsure of your position, always seek independent legal advice before you walk away from any legal obligations. If you get frustration wrong, it could easily result in a breach of contract claim.
For the previous article on force majeure clauses and coronavirus, visit http://tipsandadvice-business.co.uk/download (CD 21.16.05).
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