The COVID-19 pandemic has transformed our lives drastically in many ways, not least by creating unpredictability and previously unforeseen (and unforeseeable) circumstances such as large-scale shutdown of society, closures, curfews and other restrictions.
This has led to many parties considering whether or not their contract has become “frustrated”.
What is “Frustration”?
Frustration is a doctrine that has evolved over a long period of time.
Initially, it was considered to be an implied term within a contract (Taylor v Caldwell (1863) 3 B&S 826). However, it is now understood as a rule of law, imposed upon the parties in the pursuit of justice and fairness.
Frustration occurs when what is known as a “supervening event” (i.e. an event occurring after the contract has been signed) causes a contract to be “impossible, illegal or radically different”.
Has my contract been frustrated?
The answer to the question as to whether one’s particular contractual circumstances amount to a “Frustration” is a matter of critical and factual analysis.
You must first consider whether the criteria of a frustrated contract has been met. This involves
- Checking your contract to see if it provides for such events – this is known as a “Force Majeure” clause, which allows parties to opt-out of this doctrine, by defining what the parties’ rights and obligations will be in the event of an unexpected or unusual event.
- If a force majeure isn’t present then the next consideration is whether the event was “unforeseeable” and if it led to the obligation taking the shape of something that is “radically different”, “impossible” or “illegal”.
Please note that a contract which renders performance to be more onerous, for example being more difficult or more expensive, does not amount to frustration (David Contractors v Fareham UDC  AC 696).
What determines frustration? How is frustration decided?
The courts will take a multifactorial approach when deciding if a contract has been frustrated. To name a few of the factors considered:
- Contract terms,
- Parties’ knowledge,
- Contemplations, in particular, as to risk at the time of the contract (Edwinton Commercial Corp v Tsavliris (The Sea Angel)  1 EWCA Civ 547).
What are the Consequences of a Frustrated Contract?
Upon the determination of frustration of a contract, the obligations imposed on the parties in the contract disappear.
The approach has changed over time to provide a more equitable result for the parties involved.
The Law Reform (Frustrated Contracts) Act 1943 now regulates contracts which have been frustrated with directions on repayable sums and dealing with other benefits which are not monies. However, the courts powers are very limited, they can only apportion windfall gains/benefits but not losses, losses are not to be investigated or redistributed.
The impact of COVID-19 - and specifically, the potential short term life of future “shotgun lockdowns” where we are forced by law to cancel our arrangements and stay at home until lockdown is lifted - is likely to make the doctrine of frustration only more commonplace. It will no doubt become part of the commercial vernacular as contractual obligations become radically different, impossible or even illegal!
About GAD Commercial
We are experts in commercial and corporate law, including dispute resolution.
We have been advising our clients on contractual and litigation issues such as “frustration” for over 40 years and since the start of the Covid-19 pandemic, we have successfully navigated our clients across difficult and onerous contractual landscapes which, without our input, would have had catastrophic financial consequences.
Should you or your business require assistance with commercial contracts or litigation matters, please contact us to discuss in confidence on a no obligation basis.